Woods Tells the Story of the Meltdownby
David Gordon
Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. By Thomas E. Woods Jr. Regnery 2009. Xi + 194 pages. Tom Woods has made an invaluable contribution with his latest book. The public today looks for an explanation of the current economic crisis and a prescription for recovery. Conflicting accounts abound. Should the collapse of the housing bubble and the accompanying credit crunch be met by increased government spending, as Keynesians aver? Does the key to the mystery lie in maintaining an adequate supply of money, as monetarists think? Those of us inclined to the Austrian School know better: such foolish resorts to the government serve only to worsen matters. Austrian business-cycle theory is straightforward, for those willing to devote the necessary time to study praxeology. But therein lies a problem. The average person lacks the patience to read Human Action and Man, Economy, and State. How then can he acquire the rudiments of Austrian cycle theory and grasp why the theory is true? To set the question aside, on the grounds that it is unnecessary for the man in the street to bother with such matters, is a counsel of despair. If the public does not understand the economics of depression, there is little hope that we can avoid disastrous government policies. Unless the free market receives sufficient popular support, our economic future is bleak. Woods supplies just what we need. With great clarity, he shows that the Austrian theory of the cycle is firmly grounded in common sense. Additionally – and here his skill as a trained historian comes to the fore – he shows that Austrian theory explains not only the Great Depression but other less-well-known economic downturns as well. When the government followed a "hands-off" policy, recovery from a downturn was rapid; when, as most notably was the case in the New Deal, government tried to take control, the economy sputtered. The basics of Austrian cycle theory fall readily into place once one considers a fundamental point: the economy can grow only by producing more goods. An expansion of the money supply does not suffice. Efforts to get something for nothing, by the government's deficit spending or by an expansion of the money supply, cannot produce lasting prosperity. The speed with which an economy grows depends on the extent to which people prefer present goods to future goods. Other things being equal, people always prefer satisfaction in the present; but the extent to which this preference prevails is crucial for economic development. In order to obtain more consumer goods than are immediately available, people must postpone satisfaction by saving, enabling a greater production of capital goods to occur.
The extent that they are willing to do so determines the rate of economic growth. The preference people have for the present forms the main part of the rate of interest: Mises called this the originary rate of interest. This rate registers the way people allocate resources between consumption and production. Trouble arises when the government, by increasing the supply of bank credit, depresses the money rate of interest below the natural rate. Businessmen, seeing that money is available, invest in capital-goods industries, and the result is a boom. July 6, 2009 David Gordon [send him mail] is a senior fellow at the Ludwig von Mises Institute and editor of its Mises Review. He is also the author of The Essential Rothbard. See also his Books on Liberty.
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