Douglas Carswell had a good piece up on his blog recently about “bailout-and-borrow” economics, and the prevailing fallacy that artificially increasing demand leads to growth. He points out that despite the $1 trillion stimulus failure in America and the failure of the Greek bailout,
Today Washington is preparing yet another $400 billion bailout, while the Bank of England is preparing to print £100 billion to give to the banks.
This was inevitable; the consensus prevails because admitting defeat would be too embarrassing. It would mean admitting that policy makers have been wasting billions of pounds of public money at a time of supposed austerity; admitting that you got it that wrong means losing an election.
It’s the old problem of honesty in politics. No one calls a spade and spade and admits that they are giving to Peter by taking from Paul. When presented with quotes by George Osborne and Vince Cable form 2009 that printing money was the last resort of desperate governments and “Mugabe economics” Danny Alexander laughed it off. This is because people don’t really understand economics – they see the headline figures, they associate recessions with whoever is in government; but as Ron Paul recently said, “A lot of people just flat out don’t understand what I’m talking about.”
But the Austrian explanation doesn’t have to be complicated. It just needs to be explained clearly in the media, like the mainstream theories. Here’s a quotation from Gottfried Haberler, taken from an essay available on-line for free at the Mises Institute:
And it can be shown that certain monetary influences, concretely, a credit expansion by the banks which lowers the rate of interest below that rate which would prevail if only those sums which are deliberately saved by the public from their current income came on the capital…it can be shown that such an artificial decrease of the rate of interest will induce the business leaders to indulge in an excessive lengthening of the process of production, in other words, in over-investments.
As the finishing of a productive process takes a considerable period of time, it turns out only too late that these newly initiated processes are too long. A reaction is inevitably produced…which raises the rate of interest again to its natural level or even higher. Then these new investments are no longer profitable, and it becomes impossible to finish the new roundabout ways of production. They have to be abandoned, and productive resources are returned to the older, shorter methods of production.
This process of adjustment of the vertical structure of production, which necessarily implies the loss of large amounts of fixed capital which is invested in those longer processes and cannot be shifted, takes place during, and constitutes the essence of, the period of depression.
The ASI's Eamonn Butler has written a comprehensive Primer on Austrian Economics, available for free download. If only the BBC would put explanations like these alongside the populist ideas it dolls out all too freely, then maybe the electorate wouldn’t have stood for so much bad economics for so long. And maybe Danny Alexander would have felt compelled to explain the change of policy towards Mugabe economics.