Thursday, February 19, 2009

Indefensible Ideas About Recessions and Depressions   [George Leef]

The February 13 issue of The Chronicle Review contains an article (subscribers only) by history professor Christopher Phelps (Ohio State at Mansfield) entitled "Beyond Economic Revival." It's worth commenting on because it so perfectly captures the gleeful attitude of many on the left over the current economic turmoil. Phelps is certain that the culprit is capitalism, just as it was in the 1930s, and waxes optimistic that Americans will finally discard those foolish old free-market notions. He writes, "The recent riot of capitalistic irresponsibility has shattered the fantasy that the free market, left to its own devices, will produce rationality and prosperity." So the free market has met its Waterloo. Bring on the rationality of central economic planning!

The trouble is that the "fantasy" here lies with people like Phelps, who insist that we have been living with laissez-faire capitalism and therefore it must be to blame for the current economic meltdown. Since last year, there have been dozens and dozens of refutations of that notion. Apparently Professor Phelps missed all of them. Here is a good example, by Prof. Steven Horwitz of St. Lawrence University.

Phelps is vaguely aware that there is a free-market critique of the standard idea that the Great Depression was caused by some market failure, and also of the notion that the New Deal was just what the country needed, mentioning Milton Friedman and Amity Schlaes. But then he insists that the free-market perspective "ought, by all rights, to be on the ropes." It isn't if you understand that perspective. In fact, the current recession is perfectly consistent with the Austrian School (Phelps labels the opposing views "conservative" and "monetarist") explanation that whenever the government tampers with the supply of money and credit, the chief result will be a different (and unsustainable) pattern of investment and resource allocation than would otherwise be the case.

For anyone who would like to know what to read to be well-informed about the history and economics of depressions, David Gordon has an excellent bibliography here.

Right now, the "takings coalition" (as Grover Norquist calls the whole array of interest groups that want to use governmental power to take wealth and liberty away from others) has its hands around the throat of the country. If we're going to pry them away, it's essential that we convince a great number of Americans that our economic problems were not caused by "capitalist excesses" but instead by government actions that erased the normal market safeguards against foolish lending.

02/19 04:57 PMShare