Prosperity Amidst Crisis: Austria's Economic Policy and the Energy Crunch by Wilhelm Hankel & Jean Steinberg

Author:Wilhelm Hankel & Jean Steinberg [Hankel, Wilhelm & Steinberg, Jean]
Language: eng
Format: epub
ISBN: 9781000272468
Goodreads: 52788396
Publisher: Routledge
Published: 2019-06-26T00:00:00+00:00

Part 2

The Theoretical Background: is Economic Independence Possible?

In a nationalistic world everything is difficult to achieve except an international economic crisis, which of course is very easy to get into.

–Michael A. Heilperin, 1969

7

Demand (or Money) Illusions

Western economic policy once again must draw on the experiences of a world economic crisis. At the beginning of the thirties the (classical) thesis of the autonomous downward adjustment of flexible costs and prices failed. The United States, following the market crash of 1929, gave up its role of world creditor and reversed its capital-balance deficit via its domestic high-interestrate policy; the decline in demand and liquidity resulting from the calling-in of loans of debtor nations like Germany and Austria depressed their domestic cost and price levels and affected their profit, investment, and employment structure. The changes in (relative and intersectoral) prices and costs caused by the money and capital shortages in the deficit economies, to the utter amazement of textbook-trained theoreticians and policy makers, were at complete variance with established theory: The "imported depression," by dislocating the price and cost structures, changed the data on which business had based its production, investment, and employment estimates. Because selling prices fell even more than labor costs, profits shrank. The question was whether this was due to the stubborn refusal of trade unions to accept a like-reduction in the wage income of their members, whose now inflated real-wage position had to be adjusted to the already diminished real profits of employers.

What almost all analysts failed to see was that another adjustment process was taking place: Employers and workers reacted similarly to the deteriorating profit and job expectations by cutting back on their spending. Within the framework of their still existing (real) income possibilities all social groups sought to strengthen their financial reserves: Contrary to expectations they saved more than ever, to the surprise and chagrin of the members of the business community, for they had based their production, investment, and employment plans on "old" spending patterns, namely no rising (panic) savings tendency (or degressive demand development).

It was John Maynard Keynes who after many preliminary exercises arrived at a distillation of the actual cause of the "theory-defying" crisis. There were obvious shifts between active money (which he dubbed M1) and inactive money held in reserve (M2). The fear-induced (rather than speculation-induced) increase in liquidity preference (which is nothing more than a decrease in the money-circulation rate of the old quantity theory) destroyed the underlying assumptions of the classical working hypothesis of money circulation, according to which nothing is lost—in which saving does not mean the nonspending of money but the spending of money somewhere else (i.e., investment). To show this and at the same time to refute Say's theories of closed money circulation, which do not provide for total crisis, Keynes wrote his General Theory of Employment, Interest and Money. Keynes showed that the highly realistic (and rational) "prudent" savers endanger the operational stability of every free, value-backed economy, because no stable volume of real demand can develop

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