Friedrich A. Hayek: Champion of
Individual Liberty, Limited Government, and Free Markets
It amazes me to see so many lay-people as well as professional economist who subscribe to Keynesian economic theory, i.e. government intervention is necessary for a smoothly functioning system. The current claim by the Democrats that the Health Care system is another example of a free market failure is typical fallacious reasoning.
The basis that is used for this is usually the Great Depression.
In 1920's were a period of tremendous economic expansion; the nation's total realized income rose from $74.3 billion in 1923 to $89 billion in 1929 (20% growth over 6 years). Then in October 1929, the stock market crashed, but though this is often cited as the primary cause of "The Great Depression", it was actually only a trigger for a recession, much like we have recently seen. The actual exacerbating causes were inept government intervention.
"The Depression, I may say, which started in 1929 was rather mild from 1929 to 1930. And, indeed, in my opinion would have been over in 1931 at the latest had it not been that the Federal Reserve followed a policy which led to bank failures, widespread bank failures (40% of banks closed), and led to a reduction in the quantity of money.
What happened was that for every $100 of money, by which I mean the cash that people keep in their pockets, and the deposits they have in the bank, for every $100 of money that there was in 1929, by 1933 there was only $67. The Federal Reserve allowed the quantity of money to decline by a third. While, at all times, it had the possibilities and the power of preventing that from happening." - Milton Friedman
In addition to these mistakes, we can look at another analysis of the causes and see that they also contributed as well. But where this authority sees the contributing factors as due to a lack of government intervention, it is astonishing to see the same factors pointing to the culpability of government intervention:
In contrast, economist Charles Kindleberger, in The World in Depression, 1929-1939, sees the depression as a global event caused by a lack of world economic leadership. According to Kindleberger, Britain provided leadership before World War I. It fostered global trade by keeping its markets open, promoted expansion by making overseas investments, and prevented financial crises with emergency loans. After World War II the United States played this role. But between the wars no country did, and the depression fed on itself, Kindleberger argues. No country did enough to halt banking crises, and the entire industrial world adopted protectionist measures in attempts to curtail imports. In 1930, for example, President Herbert Hoover signed the Smoot-Hawley tariff, raising tariffs on dutiable items by 52 percent. The protectionism put an extra brake on world trade just when countries should have been promoting it. - Concise Encyclopedia of Economics (excellent treatment of the entire scope - highly recommended)
Looking at Kindleberger's premise, I don't see how he can feel there was not government intervention based on the protectionist measures widely adopted - other than the failures already pointed out by Friedman.
And the third major factor was the false faith in the Gold Standard, which caused conflicting monetary policies restricting intervention to prevent monetary contraction:
"Maybe—and maybe not. In fact, the Federal Reserve faced conflicting demands to end the depression and to protect the gold standard. The first required easier credit, the second tighter credit. The gold standard handcuffed governments around the world. The mere hint that a country might abandon gold prompted speculators and international depositors to change local money into gold or a convertible currency. Deposit withdrawals spread panic and squeezed lending. It was a global process that ultimately forced all governments off gold. In May 1931 there was a run against Creditanstalt, a large Austrian bank. The panic then shifted to Germany and, in late summer, to Britain, which left gold in September.
The United States was trapped by the same forces. After Britain went off gold, for instance, the Federal Reserve raised interest rates sharply to stem gold outflows. The discount rate went from 1.5 to 3.5 percent, which, considering the condition of the economy, was a huge increase. The best evidence that the gold standard fostered the depression is that once countries abandoned it, their economies usually began growing again. This happened in Germany, Britain, and, after Roosevelt left gold in March and April 1933, the United States." - Concise Encyclopedia of Economics
It is subsequently argued that much of Roosevelt's New Deal - apart from ending the Gold Standard - actually did nothing to aid economic recovery and actually much to hinder it. Roosevelt was not only responsible for the start of the welfare state in the US, but also the seeds of class warfare carried on to this day by Roosevelt's descendants - the Democratic Party. "Roosevelt increasingly blamed the depression on the wealthy—"economic royalists," as he called them." - Concise Encyclopedia of Economics
Once World War II began Keynesian economics was fully adopted for the war controlled economy and hailed as a great success for ending the Great Depression and eventually the post-war recovery. This fallacious reasoning went on until the 70's when the economy was overtaken by inflation and stagnation, despite huge regulatory increases and deficit spending - a circumstance which should have been impossible in Keynesian economic theory.
Some interview excerpts from "The Commanding Heights" about this period and what it took to turn it around into the greatest economic expansion the world has ever seen before:
U.S. Supreme Court Justice STEPHEN BREYER heading a Senate investigation of airline regulations: "And it turned out that 5 percent of their (Civil Aeronautics Board) time went to stop prices that were too high and 95 percent of their time went to stop prices that were too low, but always the effort was to keep the price high and not low...(after the CAB was closed down) 20 years later, the industry was employing two times as many people to fly almost three times as many passengers."
"MARGARET THATCHER (interviewed in
1993): The spirit of enterprise had been sat upon for years by socialism, by
too-high taxes, by too-high regulation, by too-public expenditure. The
philosophy was nationalization, centralization, control, regulation. Now this
had to end.
PAUL VOLCKER: It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon...
LARRY LINDSEY, Assistant to the
President for Economic Policy: Jimmy Carter was maybe the high point of
Keynesian behavior. And it simply was not working.
NARRATOR: Volcker used a blunt weapon:
He tightened the money supply. The economy went into a nosedive. Facing a
presidential election, Carter was reluctant to back such harsh measures.
NEWT GINGRICH, Speaker, U.S. House of
Representatives, 1995-1999: Reagan knew Hayek personally; he knew Milton
Friedman personally. And Reagan was, in a sense, their popularizer. So he was
the person who would take these people who were very profound but not very easy
to communicate. I don't think you'd ever get Hayek on the Today show, but you
could get Reagan explaining the core of Hayek with better examples and in more
The president is going to have more government on the backs of the people and of business and of industry, the working people, in order to try to solve the problems that were created by too much government on our backs...
MILTON FRIEDMAN: The situation was
this: The only way you could get the inflation down was by having monetary
contraction. There was no way you could do that without having a temporary
PAUL VOLCKER: If you had told me in
August of 1979 that interest rates, the prime rate would get to 21.5 percent, I
probably would have crawled into a hole. I would have crawled into a hole and
cried, I suppose. But then we lived through it. (laughs)
NARRATOR: Reagan and Volcker had set
the United States on a new economic course.
All information on this and referred pages should be distributed widely (with
appropriate references to sources) to spread Hayek's principles to as many
people as possible and move our countries toward more ideal conditions for all
Feel free to contact me with questions and comments: firstname.lastname@example.org St. Augustine, Florida, USA - These pages last updated: July 17, 2003.
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