Looking for a Hero.

Continuing the search for a protagonist of our Great Crash novel, “Follow the Money” I’m going to look at three competing economic philosophies and their proponents. Finding names is not easy, but a few candidates for our hero are bound to be mentioned here. Pity that most of them are dead.

There are three economics schools in conflict here, and in order to avoid falling too deeply into their convoluted depths, I’ll give a simplistic description of their basis. Keynesianism, named after John Maynard Keynes, is the school advocating the employment of government oversight to manipulate the levers of economic activity and create stability in employment and markets. The so-called Austrian school of Ludwig von Mises disputes Keynes entirely and holds that intervention in the market, rather than the market economy itself, is the driving factor behind economic instability. The Chicago School of Milton Friedman holds that the free market is always right and that monetarist measures by the central bank can perpetuate the boom phase of the business cycle indefinitely, banishing the bust phase from finance capitalism altogether. (Thanks to Henry C K Liu in Asia Times Online for this last info.)

Keynes seems to be the winner of the economics arguments at the moment, because all governments have become converts to Keynsianism almost overnight (except Angela Merkel, the Chancellor of Germany). Taxpayer money is being poured into stimulation schemes to make up for the loss in real wealth and real spending by the great mass of the population (the productivity and savings of prudent people being the root source of all wealth). Time will tell whether Keynes, whose ideas and proposals could well have prevented the crash, will be as effective in correcting it. Keynes would have made a protagonist for a novel, he wasn’t afraid to go out on a limb, nor to fight for his side – as when the US attempted to crush Britain with debt after 1945. Pity that he died in 1946, his health failing from overwork – he would have been a good hero for today. (With input from Prof. Robert Skidelsky’s biography of Keynes.)

A brief description of the other two economics schools follows –
The Chicago School has just been kicked into the garborator for its handling of boom economies since Nixon and Reagan, where a succession of crashes have culminated in this latest greatest one. One must also mention the unfettered Chicago economics pursued in Chile from 1973 to 1989 that resulted in financial failures the very opposite of the economic promises made – as well as having to be kept in operation by a dictator (Pinochet) and his death squads. (This part adapted from Wikipedia)

For the Austrians – F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism’.” (The Libertarian view from Thomas E. Woods Jnr.) It was Keynes who arranged for Hayek to take refuge in Britain during WWII and sponsored his election to the British Academy – the great pity was that Keynes died before the two could square off as advocates for their different economics views.

I must admit to an attempt to blend the thinking of the Keynsians and the Austrians to understand what will develop – a systems theory view – the philosophy where one has to accept that all inputs are important factors contributing to the operation of the overall complex system, and that the highest goal is to balance them. Although I do not subscribe to the views of the Libertarians,  their Austrian economics teachers do have a very useful perception of this Great Crash, what caused it, and what will prolong and deepen it. To wit –

Everything our governments are doing to conquer the crash are actually mistaken and are only policies that will worsen the world’s economies for the future. They point out the Brits and Washington are trying to print enough money to buy back the boom economy that was lost in 2007-8 – and that amount of money just does not exist. Their extreme Keynsianism within the financial circumstances of excess debt, caused by the Chicago school, has created a scenario where the measures cannot possibly work. Plenty of conflict here. Perhaps one could introduce a supernatural element into the novel and have the ghosts of Hayek, Friedman, and Keynes fighting to influence their present day successors – a somewhat Kurt Vonnegut novel structure.

The drama and skullduggery at the heart of the present crisis could hardly be improved by adding any fiction to the tale. The financial markets and the banks went out on an insupportable limb with the credit boom, and now the market reverse has destroyed a couple of trillion imaginary dollars the chips should be allowed to fall as they may. Rampant speculation and bad decisions must lead to bankruptcies to free the remaining resources for a recovery, and printing money in such huge quantities is only going to put our children and grandchildren into debt (to pay our bills) for the rest of their lives. Only the incompetents and crooks who profited from the boom speculation are going to profit from the bail-outs.

I have to hold off looking for our living hero in the Obama administration until they scale back their destructive interference in sovereign countries (like Pakistan). Meanwhile I’m leaning quite strongly toward non-American candidates –  Angela Merkel, the German Chancellor, or Peer Steinbrück, the Finance Minister, as the hero of our bust novel. Both seem show enough pragmatism to blend the doctrines of both the Austrians and Keynes – a very difficult feat – that some might think impossible. As for finding a candidate who warned us of the coming crash and was ignored, I have to nominate Henry C K Liu who runs his own NY private investment group and who said in the March 17th 2007 issue of Asia Time Online –
“On the pages of Asia Times Online over the past two years, I have tried to put forth the rationale for the inevitability of a US housing bubble burst, pointing out reasons that the resultant financial meltdown will be much more widespread and severe than has been generally acknowledged.”

You can’t find a plainer warning than that. So far we have gathered material and character possibilities – next time I had better begin to put something of a plot outline together.

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2 Responses to “Looking for a Hero.”

  1. Edward J. Dodson Says:

    These are all schools of economics, each plagued by theoretical flaws traced to the abandonment of the three-factor model developed by their predecessors, the political economists.

    A very distinct school of economics comes out of the theoretical work of a 20th century political economist named Harry Gunnison Brown, who, ironically, was one of the early Presidents of the American Economics Association. Brown earned his Ph.D. at Yale University under Irving Fisher, but he was strongly influenced by the political economists and Henry George, in particular.

    Henry George is remember, if at all, for his contribution to taxation policy and advocacy of the taxaton of location rental values. Yet, George also developed a very sophisticated theory of business cycles that has enormous value to us today. Economists need to give much greater attention to the role of property markets and land markets, more specifically. These are areas of economic analysis made impossible by the neoclassical assertion that price clears all markets, including the markets for locations. This is not the way land markets operate in the real world.

  2. kester2 Says:

    Hi Edward:

    Thanks for pointing me toward Henry George, Harry Gunnison Brown and the LVT. I have found some interesting references already.

    I see that LVT is not always proposed as a single tax, which would be more problematic. I’m not sure how the LVT would create an equitable tax system in the current economy where much of the wealth creation is in the virtual, cyberspace realm. Similarly, how does it deal with intellectual property?

    CH

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