The True Economic Recovery Plan

…the only means to shorten the period of bad business is to avoid any attempts to delay or to check the fall in prices and wage rates.

Ludwig von Mises, Human Action (1963, p. 570)

This post borrows liberally from the thoughts of famous economist, Ludwig von Mises. Mises had extensively studied the cycles of business booms and crashes and had an acute understanding of their causes and cures. His voice from the past can give us great comfort in our current time of financial crisis. It can also help us avoid the mistake of government “stimulation.” Mises foresaw the economic collapse of the Soviet Union seventy years before it occurred, having based his insight, not on political and military history, but on an acute understanding of the effects of government intervention in the economy. In relation to our current crisis, he begins by providing us with a very reassuring definition of what a depression is.

...depression is in fact the process of readjustment, of putting production activities anew in agreement with the given state of the market data:

Ludwig von Mises, Human Action (1963, p. 572)

In other words, a depression or recession, such as the one that we are in now, should be looked at as a useful time when, if government intervention can be avoided, the economy can cure itself of its ills and recover to be stronger and more efficient than ever. The free market is a dynamic system that is always repairing itself and moving towards full employment and maximum productivity. The monetary contraction that occurs during a recession is really just a means for wisdom and caution to correct the mistakes that were caused by the excesses of the economy’s preceding boom period. The overly optimistic outlook of an expanding economy led to overinvestment in capital (particularly housing in the current period) and this overinvestment led to bidding wars that brought prices too high. Now, those prices must be brought down to where they belong, even if the government attempts to prevent it.

The recovery and the return to “normalcy” can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more.

Ludwig von Mises, Human Action (1963, p. 569)

Can we have excessive boom periods and, perhaps with the government’s help, avoid the succeeding recessions? Mises is correct in answering in the negative. Mankind will, in any type of economy, always work to his own advantage and this productive feature of the human character means that people will correct their mistakes of judgment and cure their own excesses. The economy must cool itself down as a way of improving itself, regardless of the government’s attempts to prevent this improvement.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig von Mises, Human Action (1963, p. 572)

Each stimulation package from the Bush and Obama administrations has brought us one step closer to what Mises calls a total catastrophe. Each month that the recession is prolonged will reduce the confidence that the people have in the economy and its monetary system and this lack of confidence will make the inevitable lowering of wages and prices more drastic and severe.

We can take the advice of Ludwig von Mises and allow the recession to run its course and cure itself quickly or we can do what we did in the 1930’s (and what Japan did in the 1990’s) and demand that the government try to prevent the inevitable and, in so doing, allow a short-term recession to turn into a decade-long depression.

There is no use in interfering by means of a new credit expansion with the process of readjustment. This would at best only interrupt, disturb, and prolong the curative process of depression.

Ludwig von Mises, Human Action (1963, p. 578)