Tuesday, December 8, 2009

von Mises Snubbed

"Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today. Mises's ideas on business cycles were spelled out in his 1912 tome 'Therorie des Geldes und der Umlaufsmittel' ('The Theory of Money and Credit'). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that. Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. ... Government-imposed expansion of bank credit distorts our 'time preferences,' or our desire for saving versus consumption. ... Ordinarily, any random spikes in credit would be quickly absorbed by the system--the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. ... 'Theorie des Geldes' did not become the playbook for policy makers. ... Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancee, proclaiming 'A great crash is coming, and I don't want my name in any way connected with it.' ... The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher. ... John Maynard Kenyes ... was the anti-Mises. So what if Keynes had lost his shirt in the stock market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn't even refuted by Keynes and his ilk. He was ignored", Mark Spitznagel at the WSJ, 7 November 2009, link: http://online.wsj.com/article/SB10001424052748704471504574443600711779692.html.

Quoted without comment.


Anonymous said...

The Austrian School is Economics

Anonymous said...

Well... the "fiscal" and "monetary" approaches are about played out... what new paradigm will arise?