In a recent Wall Street Journal Op Ed piece entitled "The Man Who Predicted the Depression," Mark Spitznagel writes that the Austrian economist Ludwig von Mises explained in his 1912 book 'The Theory of Money and Credit' how government-induced credit expansions lead to imbalances in the economy. He writes: "Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption." If this is so, then why are governments turning pages in Keynes' playbook rather than Mises'?
By: Edward at: 24th November, 2009
Status:
Answered
Answer:
Thanks for the interesting question, Edward. As with most questions in economics, it is concerned with personal and political values; it is more about ethics than science. Ludwig von Mises began the Austrian School of Economics to combat Socialism/Communism with Capitalism. He believed that markets work efficiently allocating resources and final products. There is no need for Government interference in the workings of the market. It creates more problems than it solves. The rentier class of savers (not consumers) needs to be benefitted by higher rates of interest.
On the other hand, during the Great Depression, John Maynard Keynes sought to combat Communism and Fascism by means of government monetary and fiscal policies to increase market equity and efficiency. His goal was to eliminate the social problems of unemployment and inequitable distributions of income and wealth. In the US they were partially solved by FDR’s “New Deal” and totally solved by the Second World War’s demand for workers and taxes. The entrepreneural and working classes benefitted from the high rates of employment & consumption, and low interest rates. The question ultimately becomes: Which class do you want to benefit? Which ideology do you prefer? I believe historical experience does favor Keynes.