Wednesday, March 31, 2010

The Business End of Economics

In my post The Mises Academy in Context, I made the case for what I call the Misesian Injunction, Mises' call for every person to, for the sake of civilization, study economics. I also made the case for studying economics at the Mises Academy with Dr. Robert P. Murphy. But, you might ask, why take Understanding the Business Cycle in particular?

I would answer, in brief, that business cycle theory is the business end of economics. Take our current situation for example. Looking at the headlines, you might say that health care is a slightly bigger deal than the business cycle. Health care may have momentarily superseded the general economic crisis in the news cycle; but, as you would learn in Professor Murphy's course, this relative calm following the Fed's aggressive "remedies" is a deceptive one.

But another important consideration is how the American public's belief in free enterprise, imperfect as it has always been, descended to such a depth that it would be so quiescent in the face of such an extensive socialization of such a vital segment of the market as President Obama's health care reform? Obviously the public confidence in the market economy was shaken violently by the sight of the "kings of capitalism" (bankers, investors, executives, etc) being so completely surprised and upended by the economic crisis. Such a sight following the stock market crash of 1929 similarly devastated the prestige of the free market back then, and led to a similar quiescence in the face of the New Deal.

And there is another way of looking at this same phenomenon. Business cycle theory is the big blind spot of economists of all schools, save the Austrian. And so mainstream economists always get their analysis of the general health of the economy embarrassingly wrong (recall Irving Fisher betting on a quick recovery during the early phases of the Great Depression and Paul Krugman advocating a housing bubble in 2001 and 2002). Because of that, the reputation of the dismal science becomes even more dismal during an economic crisis. If these guys can't tell sustainable growth from an unsustainable boom, then why should we listen to them about things like price controls and state cartelization? Thus the mainstream economist's blithering incompetence in macroeconomics discredits the many microeconomic fundamentals they actually get right.

So even microeconomic interventions can often be traced back to business-cycle-inducing central bank policy. But even if you deny such causal linkages, in our day the business cycle, of all economic maladies, is still paramount in importance. As I wrote in my article For Civilization, It Is Mises or Bust:

"The longevity and the intensity of the monetary and credit expansion embarked upon by the Federal Reserve since the beginning of Alan Greenspan's term has been unprecedented. Even compared to the Hoover-Roosevelt era, what Greenspan did after the dot-com bubble burst, and what Ben Bernanke did following the bursting of the housing bubble, was stratospheric. Bernanke doubled the Fed's balance sheet in just months. (And as of now, it has been tripled.) Through engendering massive capital consumption, these measures have destroyed prodigious amounts of wealth, and continue to do so today.

Forget terrorism. And definitely forget global warming. Thanks to the machinations of the Fed, the general economic crisis analyzed by business cycle theory will be the most important challenge to overcome in our times. Therefore, to answer the Misesian Injunction and to, as Mises wrote, thrust ourselves, "vigorously into the intellectual battle", it behooves us to study the business cycle theory which enabled Mises and Hayek to predict the Great Depression, which equipped Peter Schiff and others to predict the bursting of the housing bubble, and which will explain so much of what is to come.

1 comment:

Chao Ren said...

"Forget terrorism. And definitely forget global warming. Thanks to the machinations of the Fed, the general economic crisis analyzed by business cycle theory will be the most important challenge to overcome in our times."

AGREED.