The Man Who Predicted the Great Depression

Don · Nov 8, 2009

The WSJ has rediscovered the one economist who predicted the Great Depression.

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.
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Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption.
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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. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.
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The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! 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 fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."

We all know what happened next. Pretty much right out of Mises's script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises's logic, was this a failure of capitalism, or a failure of hubris?
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How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?

Shouldn't we learn from past successes, instead of past mistakes?

{John Maynard} Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government's coffers.

He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash?

Judg · Nov 8, 2009

Capitalism and hubris are joined at the hip.

ColoradoGuy · Nov 8, 2009

So the editorial page of the Wall Street Journal doesn't like Keynes. I'm shocked.

Synonym · Nov 8, 2009

Time will tell which is right. Keynesian economics aren't my favorite either, but that's certainly not my area of expertise.

Zoombie · Nov 8, 2009

On theres a GUY named Keynes?

I thought they were talking about economics used in Kenya the country.

Haha...oh...god I'm thick sometimes.

Williebee · Nov 8, 2009

Shouldn't we learn from past successes, instead of past mistakes?

Be nice if we learned from both. Instead we have folks paid to spin one so that they can claim it is the other, and vice versa.

SPMiller · Nov 8, 2009

Zoombie said:
On theres a GUY named Keynes?

I thought they were talking about economics used in Kenya the country.

Haha...oh...god I'm thick sometimes.

If you don't know much about Keynes, he'd be a good person to research. Whether you agree with him or not, his work is influential.

ColoradoGuy said:
So the editorial page of the Wall Street Journal doesn't like Keynes. I'm shocked.

lol. No kidding. But their well-known bias doesn't necessarily invalidate their argument.

ColoradoGuy · Nov 8, 2009

Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, . .

. . . plus a brilliant mind. But we musn't say that. And where's the reverential Hayek reference? They've got their Mises, but lacking Hayek we won't have WSJ economic Bingo.

Don · Nov 8, 2009

ColoradoGuy said:
So the editorial page of the Wall Street Journal doesn't like Keynes. I'm shocked.

SPMiller said:
No kidding. But their well-known bias doesn't necessarily invalidate their argument.

What SP said. Can't we get past the ad hominems here? It's more worthwhile to debate the facts than whether the source is sometimes biased, IMO. I don't believe there are any unbiased sources anymore anyway.

SPMiller · Nov 8, 2009

Don said:
I don't believe there are any unbiased sources anymore anyway.

There never were any unbiased sources. This includes every paper ever printed, every book ever printed, and even Heinlein and Rand. I know, it hurts.

ColoradoGuy · Nov 8, 2009

I just don't see the usefulness of a lengthy quotation from the editorial pages of the Wall Street Journal saying the predictable things on economic policy. After all, I spare you the Nation and Mother Jones. That piece is essentially nothing but an extended bumper sticker.

blacbird · Nov 8, 2009

I think FedGov is in a vast conspiracy with Itself to destroy the world.

Just my opinion, of course.

caw

Don · Nov 8, 2009

Well, CG, I see it differently. I see an an administration proudly proclaiming itself Keynesian, and implementing Keynesian policies, in the face of Keynes failure to understand the onset of the Great Depression, and the widespread pollyana pronouncements of a rosy future by "mainstream" economists during 2007, when a handful of economists basing their prognostications on the Austrian school were sending up warning flags that were consistently ignored when they weren't mocked.

I think those events make it worthwhile to consider the differences between the two approaches. But given the success of the "buy a drunk a drink" approach to economic policy, I guess the discussion is really a waste of effort.

ColoradoGuy · Nov 8, 2009

Don said:
What SP said. Can't we get past the ad hominems here?

In this case, no -- not for me, anyway

Keynes wasn't interested in predicting depressions during the 1920s so chastising him on that account is cheaply disingenuous. He was working on other things (his big book thus far had been Economic Consequences of the Peace). He only became interested in the causes of the Depression after it happened, and I think much of his analysis of unemployment has stood the test of time.

Speaking of ad hominum, as you probably know, Keynes detested Hayek (and I assume Mises, although I don't know for sure), and Hayek returned the sentiment in kind. Both panned each other's books. So that is comfortingly familiar, anyway. It's been the dismal science for a long time.

GregB · Nov 8, 2009

ColoradoGuy said:
Speaking of ad hominum, as you probably know, Keynes detested Hayek (and I assume Mises, although I don't know for sure), and Hayek returned the sentiment in kind. Both panned each other's books. So that is comfortingly familiar, anyway. It's been the dismal science for a long time.

"The story I remember best happened at the initial Mont Pelerin meeting when he got up and said, "You're all a bunch of socialists.""

That's Milton Friedman, relating an anecdote about Mises. Yes, comfortingly familiar.

The Man Who Predicted the Great Depression

Don

All Living is Local

Judg

DISENCHANTED coming soon

ColoradoGuy

I've seen worse.

Synonym

Zoombie

Dragon of the Multiverse

Williebee

Capeless, wingless, & yet I fly.

SPMiller

Prodigiously Hanged

ColoradoGuy

I've seen worse.

Don

All Living is Local

SPMiller

Prodigiously Hanged

ColoradoGuy

I've seen worse.

blacbird

Don

All Living is Local

ColoradoGuy

I've seen worse.

GregB

practical experience, FTW