Friday, February 19, 2016

History of Economic Thought, Part 5: The Austrian Economists and the Great Depression

Richard Ebeling emails:

Dear Bob,

I participated in the February 17, 2016 “Libertarian Angle,” webinar sponsored by the Future of Freedom Foundation, with the Foundation’s president, Jacob G. Hornberger, on the topic: “The History of Economic Thought, Part 5.”

In this episode in our series, we discuss the Austrian Economic analysis of the causes behind and the cures for the Great Depression of the 1930s. We trace out the origin of the Depression in the monetary and interest rate policies of the Federal Reserve in the 1920s.

Guided by the ideas of Yale University economist, Irving Fisher, the Federal Reserve attempted to prevent both price inflation and price deflation through the maintenance of a relatively stable general “price level” through most of the 1920s.

However, the 1920s was a period of dramatic economic development, growth and technological advancement in the United States that was bringing about greater and new output for many goods that were often produced at falling costs of production.

If left alone, the American economy would likely have had a slowly falling price level reflecting the availability of more goods and services at lower selling costs for the consuming public. Instead, the Federal Reserve expanded the money supply and manipulated interest rates just sufficiently to prevent prices in general from falling.

Unfortunately, beneath the illusionary surface of economic stability from a stable price level, Fed policy was distorting savings-investment patterns that brought about mal-investment of capital and misallocations of labor and other resources.

When the imbalance finally began to emerge in the economic downturn of 1929-1930, the response of the government was to introduce a various of regulatory, fiscal and other interventionist policies that prevented the necessary market adjustments to restore market balance and coordination.

Thus, the economic downturn snowballed into the Great Depression. In place of the free market-adjustment policy advice offered by members of the Austrian School, government policies moved in the direction of increasing government control and interference.

And one of the leading voices for such “activist” monetary, fiscal and related policies was that of John Maynard Keynes, who ideas and influence we will be talking about in our next Libertarian Angle episode.

The webinar runs for about 35 minutes.


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