Boom! Crack! Crash!

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Inflation Crisis, and How to Resolve It
• By Henry Hazlitt
• Ludwig von Mises Institute, [1978] 2009 • 191 pages;
and Beyond Boom and Crash • By Robert L. Heilbroner •
W.W. Norton, 1987 • 111 pages; and Manias,
Panics, and Crashes: A History of Financial Crises

By Charles P. Kindleberger • Basic Books, 1987 • 320 pages.

Things have
come to a pretty pass when we have to hail economists for writing
in clear, understandable English, for deigning to communicate with
the public in an intelligible fashion. These days, of course, removing
the veil of obscurantist jargon and mathematical charts and equations
beloved by the economics guild is considered to be "unscientific"
if not downright humanistic. As a distinguished economist expostulated
when he found himself in a conference discussing the question of
freedom, "What is this ‘freedom’? I can’t measure it!"
There are no brownie points or National Science Foundation grants
to be obtained by being understandable to the average reader.

the current dismal state of the dismal science, all three of our
authors deserve plaudits for daring to write briefly, in clear English,
on a topic of great and continuing interest to the general public
– inflation and economic crisis. Once said, however, the verdict
on the merits of each of these three works must diverge sharply.
It is not enough, after all, to be clear and brief; one must also
have a pretty good idea of what one is saying.

, like John
Kenneth Galbraith
, might be said to fall into the category of
"popular economist" – that is, someone who knows
virtually nothing about economics, yet manages to write a series
of best sellers on the subject, read avidly and almost exclusively
by noneconomists, who exclaim over the profundities therein. Even
in this class, Heilbroner is a lightweight, for he knows even less
economics than Galbraith does, and lacks the mordant wit (derived,
if not cribbed, from Veblen)
and the aristocratic lifestyle of the famous opponent of affluence.
Still, Heilbroner has managed to belt out a series of books, each
even less distinguished than its predecessor. His new volume is
so skimpy as to fall into the category of "nonbook."

spends his time dancing around the topic of inflation and business
cycles without once coming to any cogent conclusion on the subject.
Indeed, he displays almost a genius for missing the point. He wonders
how it is that markets work as well as they do, because he apparently
cannot grasp the role of the price system’s incentives in conveying
knowledge of supply-and-demand conditions to all the market participants,
who adjust their actions to that knowledge.

Because Heilbroner
adopts the view, taken over wholesale from Victorian-era Marxism,
that "susceptibility to crisis" is inherent in the process
of business expansion itself, he obtusely has to reject any fundamental
monetary explanation even of inflation. So anxious is Heilbroner
to deny monetary causes for crises that he dismisses runaway inflation
as unimportant and as occurring only as "the consequence of
political collapse" – a category in which it is difficult
to fit either the runaway inflation of the American Revolution or
the famous German hyperinflation of 1923.

Sometimes Heilbroner’s
whoppers are almost breathtaking. He believes, for example, that
Keynesianism explains the current inflationary recession (or "stagflation"),
when it is precisely this violation of all the canons of their creed
that has caused many Keynesians to rethink their entire position.
And there is his assertion that "the steady intermeshing of
state and economy will be feared and fought [by the business community]
as tantamount to a surrender to socialism." Surely, by now,
every literate person knows that virtually every step into statism
in our time has been led and supported by influential members of
the business community, for reasons that are easy enough to fathom,
because they have been among the chief beneficiaries.

the book, Heilbroner searches, almost desperately, for something
that will propel society into the central planning that he alleges
is inevitable. He considers inflation and business cycles, mutters
about oil scarcity or perhaps oil surpluses, and finally falls back
upon a fashionable concern for the "environment." He is
never quite sure what will bring us to his promised land, but he
is certain that something will turn up.

At the same
time, Heilbroner avoids like the plague any discussion of some major
problems centrally planned economies have experienced in the 20th
century, from the failure of war communism and the liquidation of
the kulaks in Russia to the breakdown of central planning in Eastern
Europe and the forced draft of labor in Cambodia. Likewise, he neglects
recent events that are indicative of larger difficulties –
inflation in China and Yugoslavia, anti-price-hike riots in Poland,
miners’ strikes in Romania, roller-coaster changes of economic policy
in China, corruption scandals in Vietnam, and shortages of staples
in Cuba. Nor does Heilbroner choose to spell out in any kind of
detail the consequences for human liberty of central planning, although
in a recent essay in Dissent he candidly states that planning
requires command from above and a moral conformism that treats dissent
as heresy.

In a sense,
is the most curious of the three works. It is hard to know for whom
he is writing, or to what point. A distinguished establishment opponent
of Friedmanite monetarism in international trade, Kindleberger seems
here to be carrying his war against Friedmanism into the field of
money and business cycles. But it is done with such a bluff scorn
for theory as to lapse into a kind of mindlessness. Concerned to
deny the crucial role of money in business cycles, Kindleberger
first rules out the broad field of cycles altogether in order to
stick merely to financial panics. Concentrating on this narrow area,
it is easy for Kindleberger to lapse into a mere nonanalytic recital
of financial booms and busts, and to adopt the kind of witless "theory"
that attributes these events to unexplainable "manias"
and floods of "mass hysteria" that strike the market from
time to time.

We need not
adopt the Friedmanite "rational expectations" theory that
the market always perfectly anticipates the future, about which
Kindleberger has some shrewd things to say, in order to reject Kindleberger’s
"mania" approach. After all, entrepreneurs who are subject
to such mood swings will fail at business very early in the game.
Kindleberger refuses to give sufficient weight to the fact that
all these speculative "manias" are made possible and brought
about by bank-credit expansion. It is the continuing introduction
of new money into the economy that raises prices and gives rise
to the not-irrational expectation that prices will continue to go
up. The inflationary bubble collapses, not because people suddenly
become pessimistic, but because the banks collapse and credit contracts
rather than expands. The business mood is a rational consequence
of changes in objective conditions.

Neither in
this book nor in his previous The
World in Depression, 1929–1939
does Kindleberger display
any familiarity with the Austrian theory that expansion of money
and bank credit not only causes inflation (the Friedmanite
view), but also leads to uneconomic investments that require a recession
to liquidate and set right. But then, by focusing solely on financial
speculation and avoiding the structure of production, Kindleberger
has precluded any consideration of such a theory.

Turning to
Henry Hazlitt is a
particular pleasure after the other two works. For Hazlitt not only
has the clearest and most lucid writing style of the three; of all
economists who are gifted at writing for a popular audience, Hazlitt
has by far the soundest grasp of his subject. Hence, he is able
to put correct and even profound analysis into a highly readable

Two decades
ago, Henry Hazlitt wrote a primer on inflation, What
You Should Know About Inflation
. In the present work, he
briefly summarizes his previous analysis, and then goes on to address
various more complex problems on the subject of inflation. His subtle
and clear blend of analysis and statistical illustration is a delight.
In contrast to Heilbroner, Hazlitt understands full well the menace
of runaway inflation, and he expounds and analyzes the German case
of 1923. There is a devastating demolition of the revered "Phillips
curve," which assumes an inverse correlation between inflation
and unemployment. The Friedmanites are taken over the coals for
their mechanistic version of the quantity theory of money, their
concept of velocity, and their faulty and dangerous concept of indexating
as a way of taking the sting out of inflation.

of our authors, moreover, Hazlitt points out the class interest
of politicians in promoting inflation. For increasing the money
supply will enable prices to run ahead of wages, and will provide
a flow of subsidies to favored political groups.

Above all,
Hazlitt is totally familiar with Austrian theory, not simply with
its business-cycle analysis, but also with its view that the value
of money depends on subjective valuation rather than mechanistic
correlations, and with adherence to gold money as a means of radically
separating money from the state. Hazlitt understands that only such
separation will put the problem of chronic and accelerating inflation
to rest.

It is instructive
to contrast the Hazlitt and Heilbroner volumes. It is not simply
that they are at opposite poles, politically and economically. There
is scarcely a fact or a hard piece of analysis in the Heilbroner
book. All is cloudy and vaporous, tied only to windy rhetoric about
a supposedly inevitable triumph of planning. In Hazlitt, there are
facts and keen analysis aplenty, but all laid out clearly and forthrightly
before the reader. If this were a just world, the Heilbroner volume
would be quickly remaindered, while the Hazlitt would sell like
hotcakes to a panting public. Perhaps this will be the time.


N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor. See
his books.

Best of Murray Rothbard

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