Friday, July 16, 2004

The Mises Institute posts

an article today on Business Cycles:
Mitchell and his followers have never tried to explain the business cycle; they have been content to record the facts, and record them again and again. Mitchell’s famous "theoret­ical" work is only a descriptive summary. Secondly, these same economists were discovering a great truth that escaped Mitchell and has continued to escape econ­omists ever since: that boom and bust cycles are caused—not by the mysterious workings of the capi­talist system—but by govern­mental interventions in that sys­tem.
The real founders of business-cycle theory were not Mitchell but the British classical economists: Ricardo and the Currency School, whose doctrines have unaccount­ably been shunted by historians into the pigeonhole of the "theory of international trade." They first realized that boom-bust cycles are caused by disturbances of the free market economy by inflationary in­jections of bank credit, propelled by government. These booms them­selves bring about a later depres­sion, which is really an adjustment of the economy to correct the interferences of the boom. The sketchy theory of the classicists was elaborated during the nine­teenth century; later, the impor­tant role of the interest rate was explained by the Swede, Knut Wicksell; and finally, the full-grown theory of the business cycle was developed by the great Aus­trian economist, Ludwig von Mises.
Mises’ theory shows the com­plete workings of the boom-bust cycle: the inflationary injection of bank credit, fostered by govern­ment; a boom marked by malin­vestments caused by inflation’s tampering with the signals of the free market; the end of inflation revealing these unfortunate malin­vestments; and finally, the depres­sion as the correction by the free market of the wastes and distor­tions of the boom.
...
The classical, and now the Mises, theories have been generally scorned by modern writers, and mainly for this reason: that Mises locates the cause of business cycles in interference with the free mar­ket, while all other writers, follow­ing Mitchell, cherish the idea that business cycles come from deep within the capitalist system, that they are, in short, a sickness of the free market. The founder of this idea, by the way, was not Wesley Mitchell, but Karl Marx.
 
You can't call that last dig a... what do you call the fallacy that attacks the authority? ...he is engaging the argument.  It's guilt by association, we (that's a very broad "we") don't hate Marx because of his business cycle theory, but because his proposed solution led to all of the holocaust of the twentieth century.

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