by Thomas E. Woods, Jr.

Finally, I’ve been attacked – sort of.

So far the response to my book Meltdown, a free-market look at the financial crisis, has been almost eerily favorable. That’s very gratifying, to be sure, but criticism is what gets debate going and pushes a given subject matter beyond its typical confines.

Until now, it’s been hard to come by. Even though it spent ten weeks on the New York Times bestseller list, the paper refuses to review it. When the Times last reviewed one of my books – a review that consisted of a breathless list of forbidden things I had said, as if they refuted themselves – all it managed to do was give the book more notoriety and more sales.

Now comes a shot from left-wing blogger Matthew Yglesias, who is honest enough not to pretend to have read the book. His attack on it comes in the context of a discussion of conservatives’ increasing interest in something called Austrian business cycle theory. (He notes that staffers for Rep. Michele Bachmann, R-MN, confirm that she has been reading the book, which contains a foreword by another congressman, Rep. Ron Paul.)

Woods, Yglesias declares, is "pushing a fringe economic doctrine that tells the right what it wants to hear so he’s gaining popularity."

Um, Matthew, what right-wing circles have you traveled in over the years that have "wanted to hear" scathing criticism of the Federal Reserve? How many "right-wing" politicians can you name that have even mentioned the Fed as a political issue over the past, oh, ninety-six years?

But that’s a small point. Much more interesting is Yglesias’ dismissal of Austrian business cycle theory (ABCT) as a "fringe economic doctrine." Well, according to James Galbraith, maybe 10 or 12 of the country’s roughly 15,000 professional economists predicted the current crisis. (Ol’ Jimmy wasn’t counting hundreds of Austrian economists, natch.) Matt, you sure you want to use the consensus of these geniuses as your bellwether of respectability? Good luck with that.

I’ve written quite a bit about ABCT, both in my book and in numerous articles, so I won’t repeat the theory in any detail here. What matters for right now is that the theory, which won F.A. Hayek the Nobel Prize in 1974, exonerates the free market of blame for the boom-bust cycle. Instead, the culprit is the government-established central bank (in the American case, the Federal Reserve System), whose activities lead the economy into an unsustainable configuration that can seem like prosperity for a time, but which inevitably collapses in a bust when the accumulated resource misallocations reveal themselves. (Yes, the theory can also account for booms and busts that occurred in the absence of a central bank; see Jesús Huerta de Soto’s treatise Money, Bank Credit, and Economic Cycles.) Fiscal and monetary stimulus, in turn, are based on a juvenile misdiagnosis of the problem, and can only misdirect the economy still further.

Note that although Yglesias himself does not know the first thing about Austrian business cycle theory, and in fact doesn’t even seem entitled to an opinion, he is certain it is incorrect. Why? Because it implies that the economy is actually damaged, rather than stabilized, by our overlords. We cannot question our overlords, citizen. You are taking this "question authority" business much too far.

The Left’s motto "question authority" has almost never been employed sincerely. What it seems to mean is that we ought to question beliefs and institutions of long standing. What it clearly does not mean is that we ought to question the beliefs and institutions that our wondrous experts have replaced them with. Thus it never even occurs to Yglesias, the alleged progressive, to question the Fed. Why, the Fed furnishes us with the scientific management of the money supply! Whatever is there to question about it?

The Fed, you see, was created when the American people spontaneously cried out for banking reform. Their wise legislators promptly drafted legislation with an eye to the common good, thereby giving birth to the Federal Reserve, our warm and cuddly little stabilizing agent.

Absolutely nothing in the above paragraph is true, but it’s how inhabitants of the progressive la-la land, to the extent they give any thought to the Fed at all, seem to assume it must have come about.

Now I don’t mean to suggest that the Left won’t question anything authority tells them. They’ll question war – sometimes. The thinking seems to run as follows. Many foreign conflicts, like the war in Iraq, have begun when mean, self-interested people got hold of the ship of state, manipulated patriotic sentiment and pushed the country into unnecessary fighting. However, no major institutional aspect of our domestic life could possibly be unnecessary, or the result of self-interested activity or propaganda.

While I’m on the subject of war, how does Yglesias suppose the Iraq War – which he deeply opposed, I’m sure – was financed? In considerable part by the Fed’s creation of new money out of thin air.

Let me put this as simply as possible. Is the federal government more or less likely to go to war, and are its wars likely to be more or less costly and destructive, if it has access to a money creation machine? Why is the Left, which prides itself on its intellectual independence and its willingness to question old taboos, so intellectually moribund that an obvious question like this is never even raised? I’m supposed to take Yglesias and the rest of the misnamed "progressives" seriously when they propose to grant the government its money-creation machine but hope it doesn’t use it in an anti-social or murderous way? That’s just a super theory, Matt.

Not mentioned, presumably because Yglesias doesn’t know anything about them, are the Cantillon effects of expansionary monetary policy. This piece of economic knowledge reveals how the process of inflation generates wealth transfers to the politically well connected at the expense of average Americans, the vast bulk of whom do not even realize the process is taking place. I explained the full mechanism in this earlier article I wrote on the Left’s touching devotion to the Fed. This is "progressive" how, exactly?

When Lew Rockwell interviewed Naomi Wolf, she was honest enough to admit that she, and the Left at large, knew next to nothing about the Fed. Not Matthew Yglesias, though, who has already learned everything he’ll ever need to know. And good golly, he’s learned that the Fed is our Great Stabilizer. No further intellectual curiosity is necessary.

Yglesias links to the usual boilerplate about the economic downturns before the Fed, a subject I’ll bet he doesn’t really know anything about apart from an inchoate sense that they were Very, Very Bad, and were (of course) caused by the free market. I discuss these cases in Meltdown and a bit in this lecture. Suffice it to say that the same precipitating factor is evident in each one of them – the creation of credit beyond the level of voluntary saving, a discombobulating process that sets in motion an inevitable process of reversal, which we experience as a recession/depression.

It’s also worth pointing out that economic historians, as even the New York Times now admits, have caught up with Murray Rothbard on the subject of the so-called "long depression" of the 1870s. Charles Morris, not a libertarian by any means, wrote in the Times not long ago that "recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world’s first mass consumer society."

An article I plan to write later this month will incidentally respond to the critics of ABCT whom Yglesias has haphazardly assembled, though there is little need to reinvent the wheel: most of them have been abundantly replied to already, though Yglesias probably just forgot to include the replies. Just for starters, here are Mish on Krugman’s criticism of ABCT and Robert Murphy on Krugman’s criticism of ABCT. In addition, here’s Bob replying to Tyler Cowen and explaining why Krugman’s capital theory, if we can call it that, is too primitive for him even to comprehend ABCT. (You can listen to Bob’s article if you’re too busy to read it.) And here are Bill Barnett and Walter Block on Tyler Cowen (.pdf).

Yglesias’ reaction to growth of the Austrian school isn’t surprising – naturally he’d like nothing more than to see the debate on the economy confined to Keynesian drones versus monetarist drones. Anyone who dares to question authority, to propose that these false alternatives are intellectually bankrupt, is on the "fringe," you see. These are the approved alternatives, citizen. Choose from among them. The experts know what is best.

Citizen: But the experts have been all wrong! Shouldn’t we question them? Shouldn’t we listen to the people who had a clue?

Commissar: Let us hear no more of this anti-social talk about your betters. Stay away from the fringe, citizen. Listen to the experts.

May 12, 2009

Thomas E. Woods, Jr. [visit his website; send him mail] is a senior fellow at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. Read Congressman Ron Paul's foreword to Meltdown.