Making Economic Sense by Murray N. Rothbard

Author:Murray N. Rothbard [Murray N. Rothbard]
Language: eng
Format: epub, pdf
ISBN: 0-94546-646-3
Publisher: Ludwig von Mises Institute
Published: 2006-11-06T16:00:00+00:00

71

THE RECESSION EXPLAINED

“Itold you so!” may not be considered polite among Recession friends or acquaintances, but in ideological clashes it is important to remind one and all of your successes, since neither the indifferent nor your enemies are likely to do the job for you.

In the case of Austrian business cycle theory, shouldering this task is particularly important. For not only have our ideological and methodological enemies been all too quick to bury Austrian theory as either (a) hopelessly Neanderthal and reactionary, and/or (b) obsolete in today’s world, but also many of our erstwhile friends and adherents have been joining the chorus, maintaining that Austrian theory might have been applicable in the 1930s, or, more radically, only in the 19th century, but that it definitely has no application in the modern economy.

Well, to paraphrase the great philosopher Etienne Gilson on natural law, Austrian cycle theory always survives to bury its enemies. In contrast to conventional wisdom, from Keynesian to monetarist to eclectic, Austrian theory has recently triumphed over its host of detractors in the following ways:

1. The perpetual boom of the ’80s. As the 1980s went on, the Conventional Wisdom (CW) trumpeted that recessions were a thing of the dead and unlamented past. Here was a new era, of perpetual prosperity. Wise governmental fiscal and monetary policies, combined with structural changes such as the age of the computer and global capital markets, have made sure that we never have a recession again, that 1981–82 was the Last Recession.

I have long asserted that the best “leading indicator” of a recession is when the CW has started proclaiming the end of the business cycle and perpetual prosperity. Sure enough, here we are, and, as Austrians point out, the bigger and the longer the boom, the greater and deeper will tend to be the recession necessary to wash out the distortions and malinvestment of the inflationary boom, brought on by bank credit expansion.

2. The end of inflation. During the great boom of the ’80s, the CW also proclaimed that inflation was a thing of the past. It was over, licked. Again: wise government monetary and fiscal policies, coupled with structural economic changes, and “efficient markets,” insured that inflation was finished. And yet, inflation, which never really disappeared, is back in full force, and is even stronger now, in the depths of recession, than it was during most of the boom—a sure sign that not only is inflation still with us, but that it is going to pose a severe and accelerating problem as soon as recovery occurs.

3. (A corollary of one and two.) They forgot about inflationary recession. Inflation has persisted in every post-World War II recession since 1973–74, and indeed really began in the 1957–58 recession, after a couple of years of recovery. Yet everyone—and that means everyone including all wings of Establishment economics, and financial writers and forecasters—forgets all about the new reality of inflationary recession (also called “stagflation”), and writes and talks as if the choice in the coming months is always between inflation or recession.

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