Modern economists had consigned them to history, but with the recent crisis of capitalism, they’re suddenly back.
No, not the Marxists, but the Austrian School of Economics.
With Keynesian ‘spend your way out of a recession’ policies plainly getting America and Britain even deeper into stagflation, the Austrians – so called because their early exponents (including Nobel laureate and Road to Serfdom author F A Hayek) taught or studied in Vienna – offer perhaps the most convincing explanation of our problems and what to do about them.
It’s the usual boom-bust cycle, they say. Governments and central bankers love a boom. So they keep interest rates too low, borrow too much, and pay for it by printing money. But this one is the mother of all boom-bust cycles. For three decades, the authorities have tried to head off every problem – the Savings & Loan crisis, the 1987 crash, the Russian default, and 9/11 – by flooding us with cash.
But, claim Austrians, cheap credit policies contain the seeds of their own destruction. They encourage people to borrow and spend. Hoping to cash in on this spree, businesspeople also take advantage of cheap loans and invest in new plants and equipment to boost their output.
Like a drug-fuelled high, though, this artificial boom cannot last. Only bigger and bigger doses of cheap credit will keep the high going. The spending boom bids up the prices of homes and luxuries, which become as unaffordable as they were before. Meanwhile the low interest rates discourage saving, and the banks have to rein in their lending.
With everyone now short of cash, bust becomes unavoidable. All those gleaming new production lines make things that people are no longer buying. Inevitably, production has to be cut back to match the reality. There will be widespread losses. Plant and equipment must be written off, boom-time businesses will fail, and workers will be laid off.
There is no way to avoid this: somehow, reality will break through. Sure, you can reach for a Keynesian-style hair of the dog, sending interest rates rock bottom and injecting more quantitatively-eased cash. But, say Austrians, this simply delays and worsens the inevitable hangover.
Austrians are actually sceptical of almost any government-led interventions in the market. Market prices, they argue, are powerful indicators of the state of supply and demand. Manipulating prices does not change that reality: it just prevents markets from working properly and produces perverse results.
The present crisis convinces Austrian economists that interest rates – the price of credit – should be decided by markets, not by political authorities. And given that our money has lost about 98% of its value in as many years, they believe it’s also time to limit the power of governments – and bankers – to create as much of the stuff as they want.
Do all that, say Austrians, and the fake-boom, real-bust cycle will never trouble us again. These policies may seem radical: but like a growing number of others, I’m beginning to see the common sense in them.