As a wise man once said “history is cyclical”; if we are to understand today’s dilemma we should first review similar historical occurrences. Murray Rothbard’s detailed analysis is very insightful because it takes the road less travelled among modern Keynesian economists. He picks Hoover as a major starting point, heavily critiquing Hoover’s interventionist idealism; his belief that he could manipulate the market to better the growth of the country and save it from any “marginal faults” (Rothbard, 188). Rothbard details Hoover’s step-ins with unemployment and labor relations and marks them as two “interventionist” measures. But what really distinguishes an intervention from a “guideline”? We know that a desirable feature of a parent is one that allows for lessons through errors, but still sets a guideline. This is a fuzzy area, but a fellow Austrian school economist of Rothbard’s, F.A. Hayek, set the baseline within what he dubbed “individualism”. He defined the
The essential features of individualism: (as) the respect for the individual man qua man, the recognition of his own views and tastes as supreme in his own sphere… and the belief that it is desirable that men should develop their own individual gifts and bents (Hayek, “The Road to Serfdom” 69)
Hayek simply wished that every man be allowed to possess and follow his own set of values, without the intrusion of outside actors. This characterized the outstanding feature of a guideline; Hayek gave the government the seat of power in defining the laws which guardian these vital ideals. Hayek’s definition, aware of real-world imperfections,
…does not deny, but even emphasizes that, in order that competition should work beneficially, a carefully thought-out legal framework is required and that neither the existing nor the past legal rules are free from grave defects (Hayek, “The Road to Serfdom” 86)
This allowance for government intervention is considered by many to be the Austrian school’s straying point from Classical Liberalism. The fallacy that laissez-faire theories, derived from Classical Liberalism, require complete non-governance allows many to classify those like Hayek and Rothbard separately from Adam Smith, when, in reality, Smith recognized the necessity for government intervention more than a century before, in “The Wealth of Nations”. Furthermore, the Austrian idea of the “Rule of Law”, protects every man equally from the abuse of others by
Limiting the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes the legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination (Hayek, “The Road to Serfdom” 120)
Classical Liberalism believed in laissez-faire policies, but never as lucidly protective of individualism as Hayek’s Austrian creed. With this loaded gun of social philosophy, Hoover looks like a dunce. Rothbard nails him as the idiot “unfettered by outworn laissez-faire creeds… (who brought America) to her knees as never before” (Rothbard, 207). This bow was known as the Great Depression; well once again America is down, and nearly face first.
It is good to recognize that politicians may be like parents in one way, but in another they are like drug dealers… always selling that next re-election hit… getting their constituents high as a kite, only to leave them spiraling into withdrawal once they leave office. Driven by a time-consistency problem, they support many proposals that create temporary benefits, but spawn exponentially worse long-run consequences – whether apparent at the outset or not. As we have discussed, a major underlying structural deficiency exists within the economy – clearly worsened by those in office. But first, fixing a problem requires knowledge illuminating the roots of the issue – identifying the catalyst at the first flake of the avalanche. Considerable disagreement exists over the current crisis’ birth, with each explanation deriving answers from the same line of logic; the majority of reports differ only in how far they trace back the failures. Austrian economists blame the existence of the Fed, the average American blames Wall Street, and Ben Bernanke blames everyone and no one (all at the same time!) – the reality lies somewhere in the middle ground between these extremes of genius and ignorance.
Economist Thomas Sowell finds this logical fairway (using the Rothbardian style of locating interventionist governmental measures) “beginning in the 1990s (when) getting a higher proportion of the American population to become homeowners became the political holy grail” (The Housing Boom and Bust, NRO). The motives are painfully obvious: Q. How does a politician gain votes for re-election? A. Create better living conditions Q. What can politicians do to make this easier for their constituents? A. Relax lending/mortgage conditions by restricting the growth of banks which do not fulfill quotas. By repealing the Glass-Steagall Act – which separated commercial and investment banking – the government gained a hand in regulating banks directly, allowing them to manipulate banking actions to their benefit– both parties (Glass-Steagall Act - Further Readings). At this same time other government policies artificially increased housing prices, exacerbating the situation. Of course the government alone is not to blame, the citizenry did elect them after all. Moreover, corruption amongst those like Goldman Sachs and Hank Paulson didn’t help the problem. When you look at it as a whole, it becomes very apparent that this problem developed from structural deficiencies, located not only within investment institutions, but more importantly the banking system – and in particular the government’s ability to distort the sector’s price mechanism. If Rothbard and the old school Austrians were to write a book about today’s economy they would fill a library with the amount of interventionist policies and laws passed as “laissez faire”.
But the best medicine is always hardest to swallow. Rothbard said it best, the “proper injunction to government in a depression is cut the budget and leave the economy strictly alone” (Rothbard,185). It is as simple as diet and exercise. It is not a complicated process. Those who try to complicate it only intend to exploit the economy (as we have seen throughout this analysis). Of course there will always exist grey areas concerning guidelines and interventionism, and the people will always be asking for help, but these problems must be surpassed. We must watch-out for the long run and let people learn from their mistakes on their own. Darwin explained adaptation and so it applies over a single life – the people must learn what is sustainable and what is not. Keynes may have said that “In the long run we are all dead”, a statement that has defined the past half century of economic distortions. It is a true statement, and a good reason for some protection, but too much leads to where we are now. And if we only live in the short run, then there will be no long run for us (or our children) when we get there.
Disclosure: No positions