http://mises.org/story/2924Oh Keynesian, Where Art Thou?
We are about to be reminded that empires do not fall because of barbarians at the gates, wars of civilizations, or free trade. It's the inflation that kills themDepending on the particular story,
we reach various versions of the Keynesian ideology, which apparently has a universal cure for the economy: government policies. Again, it may be fiscal policy, or monetary policy. Pick a version of your Keynesian story, and you'll know which solution to pursue. But the conclusion is rather obvious:
the state, through its compulsory means,
has to boost the level of aggregate demand in some way to stop the economy from falling into recession...For a sustained amount of time the US government did everything it could to aggressively engage in monetary and fiscal pumping. Budget deficits soared and the interest rates were lowered to absurd levels. This helped the supply of dollars to go through the roof and prepare the green paper money for a remarkable collapse...
What matters for economic activity is the money supply and the consumer price index (CPI) determined by it. The most famous monetarist, Milton Friedman, was primarily obsessed with money supply and keeping the CPI stable. If the CPI is unwavering, then the economy has to be in good condition. Problems might arise only when the official rate of inflation gets out of control. But if it is kept at low levels, then the economy is under control, and the monetary policy is sound.In an interview from 2003 (conducted by Henri Lepage), Friedman stated that the conditions of prosperity are secured. The inflation monster has been tamed, unemployment is low, there is no financial crisis and no deflation, productivity is growing, and banks are in good shape...
For many years Friedman praised Alan Greenspan's monetary policy. And although he did differ in some way from others (as most Keynesians differ one from another) and did not accept the discretionary tools that the Fed used...
Now, as we see, the current problems can be explained neither by the monetarist way of thinking nor by the Keynesian. Both macroeconomic approaches are flawed and cannot be applied to the recent crisis. The remarkable silence from those two doctrines proves the point.
I do not mean that they do not discuss the crisis. Mainstream economists do talk about it, but they are not using the Keynesian and monetarist doctrine...
nobody seriously states that the crisis is a result of decrease in aggregate demand and lack of loosened policies...Price relations, resource scarcity, the structure of liabilities and expected revenues between the firms in the market are the key issues. Welcome to the world of Austrian economics...
One should not forget about Mises's great insight that (
http://www.mises.org/story/2370)
middle-of-the-road-policy leads to socialism, which applies well beyond price controls. His contribution was that the price control imposed upon the market would not lead to expected results, but instead would create chaos. The endgame is to either abolish all controls, or go along the way of extreme interventionism and end up with full socialism, in which the government runs the economy...
What we are witnessing is a great demonstration of one of the most important Austrian contributions to monetary economics: that a central bank has socialistic potential. Think about it.
In socialism, the central planner increases the amount of goods he possesses by means of expropriation. If he needs anything, a decree is the way to acquire it. In the central banking system, the decree is replaced by something else: printing money. If something is needed, direct expropriation and an official decree are not required; fiat money is enough. Print the money and you can buy anything you want...
The ultimate boundaries differ of course. Under old-fashioned socialism, there is always the possibility of creating enslavement through direct use of force. In contrast, in the financial socialism that is being created right now, the last stop is hyperinflation, which will ultimately destroy central bankers' only way of redistributing property — fiat money...
Mainstream economists will not advise the abolition of this tool...
