A HISTORICAL PERSPECTIVE OF THE CURRENT ECONOMIC DOWNTURN (Print Version)
by Harry Valentine*
Le Québécois Libre, March 15, 2009, No 265.
The economic news of the past several weeks is causing great concern. Analysts have even questioned the long-term viability of General Motors, which was once the world’s largest manufacturer of automobiles. Numerous free-market economists have identified the easy money policies of the US Federal Reserve as being the culprit behind the present economic malaise. The US Government and several other governments around the world seek to rectify this malaise by injecting new money into their respective national economies.
During the roaring 20s, easy credit and low-interest loans set off an unsustainable speculative boom on the American stock market that collapsed on Black Monday in 1929. The easy money policies that preceded the housing mortgage meltdown of October 14, 2008 had distorted prices in the market and led to massive malinvestment. Automobile manufacturers answered the market call based on that distorted market information and their sales of various designs of vehicles boomed. As the market slowly underwent correction, however, their parking lots filled with vehicles people no longer wanted.
The Need for Market Prices
The economic stimulus packages that are being initiated by many national governments have the potential to further distort the market pricing structure. In his treatise entitled Socialism, Austrian economist Ludwig von Mises warned about the dangers of misleading economic signals caused by excess printing and circulation of new money in a government-controlled state economy. The once-renowned socialist economist and one-time Polish economics minister Oscar Lange agreed that even a socialist economy needs a market-based pricing structure in order to survive.
Dr Lange authored the economic blueprint for the post-World War II rebuilding of eastern bloc socialist economies. A “free-market economy” in West Germany became the economic model upon which the eastern bloc pricing structure was based. Dr Lange knew that a credible “free-market” pricing structure would reduce or eliminate malinvestment in the fledgling socialist economies. A credible and reliable pricing structure enables socialist officials to efficiently allocate scarce resources.
The elevation of Ludwig Erhard to the post of chancellor of West Germany after World War II provided the economic opportunity that socialist regimes needed in order to efficiently rebuild their economies. Erhard allowed a greater measure of laissez-faire economic activity to prevail as Germany rebuilt itself in the aftermath of war. The economic activity provided crucial pricing information to socialist officials who were rebuilding their war-wrecked economies. The so-called post-WWII “economic miracle” that rebuilt socialist economies depended on accurate pricing and economic information from a free-market economy that was also being rebuilt at the same time.
The recently-announced economic stimulus packages from Washington and London involved the nationalization and near-nationalization of several banks and large industries. It has the potential to further distort market economic information and disregards the essential need for accurate pricing information upon which to rebuild an economy, a concept understood even by a socialist economist such as Oscar Lange. The easy money policies of the US Federal Reserve between 2002 and 2008 were essentially an economic stimulus package that culminated in the mortgage meltdown of 2008.
A Recipe for Stagnation
Over the short term the recently-announced economic stimulus package will stimulate economic activity and distort the pricing structure in some economic sectors. Much of this activity will occur while the market will still be rife with distorted signals caused by the earlier round of economic stimulus that caused the boom in house construction. The upheavals in the housing sector and automobile manufacturing sector are essentially market corrections that attempt to liquidate malinvestment. The high-tech bust and the dot-com meltdown of 2000 were also market corrections to the massive malinvestment that occurred in the high-tech sector.
During the 1990s the government and Central Bank of Japan tried to stimulate an economy that was rife with malinvestment. The Japanese economy remained essentially stagnant despite state efforts to stimulate economic activity through a variety of public works projects. An economy that remains essentially stagnant while the government prints and spends new money on a variety of projects defies Keynesian economic theory, which provides no explanation for such economic events.
Despite Keynesian economic theory having repeatedly been debunked and refuted by numerous free-market economists, it is the theory to which western governmental economic advisors wholeheartedly adhere. They are therefore almost predestined to follow Japan’s failed attempts to revive an ailing economy. They will invariably follow the economic path of Julius Nyerere (PhD in Marxist economics—London School of Economics) who after becoming head of state of a then-newly independent Tanganyika, tried to improve the idyllic economy of the new Tanzania using Marxist theory. The result was an economic catastrophe that included famine.
* Harry Valentine is a free-marketeer living in Eastern Ontario.