My first post in this forum. So, howdy from Texas, and Ron Paul's district no less.
I'm pretty much an economic layman by most standards, but I'm working to rememdy that. Anyways, I've read the P.I.G. to the Great Depression and the New Deal by Robert Murphy. It cites the theory by Robert Higgs that market uncertainty (of course, coupled with Progressive policies) contributed to the longevity of the depression, or more specifically as he calls it, "The Great Duration".
Although this strategy proved successful politically—FDR was reelected by a landslide in 1936—it had a disastrous effect on the recovery: by creating heightened fears about the security of private property rights, it caused investors to refrain from making enough long-term investments to propel the economy back to full prosperity.
However reading the Business Cycle Primer by Lew Rockwell, he seems to repudiate this perspective:
The idea is this. If consumers believe the economy is headed down, they might save instead of spend. The business sector, afflicted with the same fears, doesn’t invest. The two forces merge to create a decline in overall demand for goods and services, and, next thing you know, it’s straight into the economic gutter. So is there anything to the "talk theory" of recession? As Frank Shostak has pointed out, this theory implies that underlying economic reality has no meaning. Whether we are rich or poor depends on our collective state of mind. A recession becomes nothing but a national bad mood. On the same theory, you could also claim that the economic boom of the 1990s was a result of happy talk from government officials. And maybe, based on this idea, the best way to avoid recession is to turn off our radios, televisions, and computers. We should just sit back and meditate on government press releases. That’ll keep the boom going.
The idea is this. If consumers believe the economy is headed down, they might save instead of spend. The business sector, afflicted with the same fears, doesn’t invest. The two forces merge to create a decline in overall demand for goods and services, and, next thing you know, it’s straight into the economic gutter.
So is there anything to the "talk theory" of recession? As Frank Shostak has pointed out, this theory implies that underlying economic reality has no meaning. Whether we are rich or poor depends on our collective state of mind. A recession becomes nothing but a national bad mood.
On the same theory, you could also claim that the economic boom of the 1990s was a result of happy talk from government officials. And maybe, based on this idea, the best way to avoid recession is to turn off our radios, televisions, and computers. We should just sit back and meditate on government press releases. That’ll keep the boom going.
So are these two perspectives in conflict? Am I missing something? I don't doubt the validity of the Austrian theory of the business cycle, I'm just looking for some clarification.
We all have our moments.
They're talking about different things. Higgs is talking about "regime uncertainty", which has nothing to do with emotional downward spirals (which is what Rockwell and Shostak are refuting) and everything to do with rational business decisions.
According to the regime uncertainty theory, the risk of intervention is so high that businessmen reasonably decide to consume their capital rather than invest it only to have regulation destroy its value or taxation expropriate its fruits. Moreover, if businessmen at least had some idea of the nature of the coming intervention, they would be able to adjust their investments accordingly. But since New Deal-type interventions are so wild and desperate, there's no telling what might regulated or expropriated, further adding to the incentive to simply consume capital. On the other hand, according to the "talk theory of recession", businessmen, without regard to specific market opportunities and risks, resort to a permanent attitude of despair and hopelessness in response to the general, broad direction of the market.
The former is a typically Austrian theory of how acting man rationally deals with the data of the market. The latter is a typically Keynesian theory of how "animal spirits" man mindlessly reacts to crude stimuli. I'm sure Rockwell and Shostak would join Higgs in supporting the former, and Higgs would join Rockwell and Shostak in denying the latter.
Higgs says that if you are unsure whether the government will outlaw all auto mobiles in the next few years , versus if you have a reasonable expectation that the government will not outlaw all auto-mobiles in the next few years, the former is more likely to lead to a thriving auto industry that serves customers needs now and into the future, whereas the latter is not.
Rockwell is responding to the fallacy that claims that people are nothing but creatures of the herd, who are immune to responding to incentives to profit, and whose pessimism in the face of entrepreneurial prospects will condemn us all to the poorhouse.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
EDIT NOTE: I added a bit more in my post above to make my depiction of the general idea of regime uncertainty more complete.
Thank you both for your concise answers. They were both helpful.
Just to add something: There is no correlation between the total aggregate output of final consumer goods and the level of employment.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
i'll put in my two cents, not really different from the other posters:
Lew is talking about the theory that you can go from a good economy to a bad one by talking gloom and doom. He rejects this because most people are not really influenced by idle chatter, and prefer to check what reality is saying.
Higgs is talking about going from a bad economy, already ruined by a insane maniac for President, to a worse one, because who knows what he'll do next? That is not relying on idle chatter. There is a solid reality causing these worries.
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It's easy to refute an argument if you first misrepresent it. William Keizer