Friday, September 26, 2008

What would Hayek say? (amv)

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. . . . To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. . . . It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown. (1932)


Let Them Fail by Peter Boettke

The market economy is a profit and LOSS system. Imprudent decisions do require correction --- if not by the individuals themselves, then by others who enter into the market in the hope of realizing the profit opportunities others are mistakeningly leaving on the table. This is how markets work; this is how markets self-correct. The self-correction properties of the market economy is perhaps the most important lesson of economic science (not an issue of faith) that must be communicated to the general public. Unfortunately, this fundamental truth of economic theory is one of the first casualty of crises.Firms enter and exit all the time in a vibrant market economy. During my days as an economist/Sovietologist one of the factoids I peppered my public talks with was the number of bankruptcies in NYC in one month in 1995 versus the number of bankruptcies in all of Russia from 1991 to 1995. The number in NYC swamped the number in Russia. Firms get driven from the market, executives who made poor decisions lose their jobs, and industries that no longer meet consumer demands become obsolete. Was it a crisis for water-carriers to be driven from the market by the innovation of indoor plumbing, or for the whaling industry in New Englad to be displaced when electric light became wide-spread.Resources do not disappear, they get reallocated. The market process is a mechanism for the continual re-evaluation and re-shuffling of scarce resources among alternative uses. This is what is meant when we refer to the market as a dynamic process of entrepreneurial discovery and learning.The most important "wisdom" of market process theory is to get out of the way of the process of adjustment. The poor decisions in one period must be penalized, the malinvestments made by businesses must be cleaned out, and the opportunities for hitherto unrecognized profit opportunities must be allowed to be exploited. Bailouts, regulations, taxes, redistribution, and inflation only hinder the ability of the market to self-correct.Besides the economics, there is also constitutional and ethical issues that should be considered when such sweeping legislation is proposed. Consider the classic essay "Not Yours to Give" by Davey Crockett. There is also a consequentialist issue at stake. A free society works best when the need for the policemen (read in this case regulator) is least. Individuals must be equiped to embrace the troubles of thinking and the cares of living if they are to live free as a self-governing citizenry.The consequences of our current policy path are dire in terms of economics, politics, and freedom.

Source: The Austrian Economists