In a confrontational and much-needed LewRockwell.com article, Prof. William Anderson launched a counter-attack against mainstream academic economists’ refusal to consider seriously the Austrian School’s theory of money. Despite the fact that Ludwig von Mises’ 1912 theory of money explains booms and busts better than rival theories, and despite the fact that Austrian School disciples predicted the most recent bust when academic economists denied that such a bust was imminent, Austrian School economists get no respect. I could almost hear Aretha Franklin as I read Anderson’s essay.
I would put it somewhat differently. I would say that the nine-decade blackout on Mises’ theory of money has fared better than the seven-decade blackout on his theory of why socialist economic calculation is impossible (no capital markets), and therefore socialism as a system will fail.
What rescued Mises’ theory of socialism was the bankruptcy of the Soviet Union in 1988, the fall of the Berlin Wall in 1989, and the suicide of the Soviet Union in 1991. Reality had undeniably triumphed. So, grudgingly, there was a new willingness by a few mainstream economists to give Mises’ 1920 essay, “Economic Calculation in the Socialist Commonwealth,” at least a footnote. One old-line socialist even admitted in print that Mises had been right. Robert Heilbroner, who became a multimillionaire from royalties on his undergraduate textbook on the history of modern economic thought, The Worldly Philosophers, which did not mention Mises, said so in print. He made his admission in a non-economics setting: The New Yorker (Sept. 10, 1990).
So far, there has not been a breakdown of the monetary system comparable to the breakdown of the Soviet Union. The Soviet Union always was, in Richard Grenier’s magnificent phrase, Bangladesh with missiles. Because it had power, Western intellectuals gave its system credence. But it had always been blood and mirrors from 1917. When it went belly-up, Western economists at last abandoned ship. They had not even made it in time to the lifeboats. They had only their lifesavers to let them float away.
What we need — and what we are going to get — is a monetary crisis comparable in scope to the crisis of the Soviet Union. Mises called this event the crack-up boom: mass inflation. It will undermine the capital markets. Thus, Western state capitalism, funded by fiat money through fractional reserve banks, will at long last achieve what socialist economies achieved first: economic blindness.
Meanwhile, Austrian School economists suffer from Aretha Syndrome. Anderson writes:
Austrian economists and the intellectual tools they bring to the table are needed more than ever, yet the response of the economics profession has been to be even more aggressive in denouncing Austrians as “quacks” and “charlatans” and making sure that they are excluded from any academic and political discussions about this crisis. However, if one wishes to see just how superior the Austrian position has been, the best proof is to watch clips of Peter Schiff (Irwin’s son), who is a well-known investor and fund manager, debate mainstream economists and other “financial experts” by using the Austrian analysis against their viewpoints. Schiff clearly understands the nature of the crisis and how to stop the bleeding and cure the “patient”; the others blindly stumble about, citing the “expertise” of economic theories that lead to nowhere.
For years, economists from the University of Chicago and others influenced by them have claimed that Austrian Economics is rejected by the mainstream because it “fails the market test.” Their logic goes like this: (a) Mainstream economists accept good theory and reject bad theory; (b) Austrian Economics is rejected by the mainstream; (c) Therefore, Austrian Economics is bad economics.
The real market test is not what a guild of self-accredited academic economists write in the tenured safety of their tax-funded ivory towers. It is not what a committee of equally subsidized peers determines is fit for publication in the guild’s unread and unreadable academic journals. It is the market outside the insulated halls of ivy that determines what survives and what does not.
MISES VS. FISHER
We have seen a similar test before. The real world imposed a vote of “no confidence” on an earlier critic of Mises: Irving Fisher.
Fisher was the dean of American economists in 1929. For two decades, his theory of money was dominant. He did not accept Mises’ theory of the effects of central bank fiat money: to destroy capital investment by lowering the interest rate below what it would otherwise had been.
Fisher believed in monetary aggregates, not monetary distortion. The entire academic profession agreed with Fisher. It still does.
The debate has not changed fundamentally in over nine decades. Each side refines its arguments, but the basics do not change.
Mises used his monetary theory to predict the Great Depression of the 1930’s. In 1929, he turned down a lucrative job offer from Austria’s Credit Anstalt Bank. He was convinced that the bank was vulnerable to the panic that was coming. He did not want his name associated with the bank. In 1931, its collapse triggered a wave of bank defaults in Europe.
Mises wrote a critique of Fisher in 1928, which is available free on-line here. It is found in the section on “Monetary Stabilization and Cyclical Policy.”
Fisher’s conceptual error, Mises argued in 1928, was that he did not recognize the distorting effects of monetary inflation, caused by expansionary central bank policies. The price level — always a statistical tool of special interests — may remain stable, but this does not overcome the boom-bust effects of monetary inflation on the structure of production (pp. 85—88).
Fisher’s theory of money defined inflation as a rise in prices, not an increase in money. His theory produced blindness to the effects of central bank inflation on relative prices, especially of capital goods. Fisher did not see the depression coming. Mises did.
On September 15, 1929, on the basis of his theory of money, Fisher issued this now legendary prediction: “Stock prices have reached what looks like a permanently high plateau.” He repeated this for months thereafter.
Fisher had invented the Rolodex card file. He was a rich man in 1929. He lost his entire fortune, valued in the millions, plus the fortune of his wife’s sister, in the ensuing depression.
It is amusing to learn that two staff economists at the Federal Reserve Bank of Minneapolis have used modern (non-Austrian) economic theory to conclude: “Fisher Was Right!” They published this in the Bank’s in-house academic journal.
Many stock market analysts think that in 1929, at the time of the crash, stocks were overvalued. Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued. In this paper, we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations. Our estimate is based on values of productive corporate capital, both tangible and intangible, and tax rates on corporate income and distributions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.
It was a great theory, they say. It was the theory that counted, not his forecast. He was right in theory. He was wrong in his prediction.
He was wrong in both.
The modern economics profession is so hostile to Mises, who argued that central bank inflation in the 1920’s caused the Great Depression, that they are still ready to swallow Fisher — hook, line, and sinker.
Continue reading…
From LewRockwell.com, here.
