I have just joined the community. This is my first post and I hope to learn more about the fantastic Austrian theory here in the Forum.
My doubt is about some things that Rothbard says in “America’s Great Depression”.
First, he says that “what can help a depression is not more consumption, but, on the contrary, less consumption and more savings (and, concomitantly, more investment). Falling prices encourage greater savings and decreased consumption by fostering an accounting illusion” (page 17 in the PDF version available in mises.org).
My first question is what you have to say about the argument that says that falling prices shows losses in business and drives off investments?
He also says that the shift of factors from the higher to the lower stages speeds the market’s adjustment process (page 18). But this affirmation doesn’t contradict the first one that what can help a depression is more savings - which is connected to the investments in higher stages goods?
This idea of investments in higher order goods motivated by the rise in savings is cited in page 10: “when saved funds increase, businessmen invest in ‘longer processes of production,’ i.e., the capital structure is lengthened, especially in the ‘higher orders’ most remote from the consumer”.
The problem I believe you’re having is not differentiating between “normal,” “good” or “well-directed” invesment and malinvestment in regards to boom and busts.
Rothbard has a paragraph on this issue from page 18:
So, your concern is a good one, but the best thing we can do is be patient. Government intervention to try to speed up this process of correction will only lead to more “market failures.” (However, what government could do is get out of the way and repeal as many unnecessary and cumbersome regulations as possible.)
He doesn’t contradict himself. The problem a credit contraction or a recession/depression is trying to correct is malinvestment during the preceding artificial boom. So there will be a shortening of the structure of production, but mainly in those sectors where the investment shouldn’t have been in the first place. In order to recover from a downturn, you need an up-turn and that recovery can only happen with increased savings and investment, which must mean a withdrawal of consumption in the near-term in order to have more consumption in the future.
Think of the housing market. What would make the correction happen faster, and thus get our economy back on a sound footing, trying to prop up housing prices so that prices don’t come down as much or as fast as they would if we just left the situation alone, or just letting the prices of housing to collapse?
You might want to look at works that deal specifically on the business cycle theory. Roger Garrison’s lectures either here on mises.org or at fee.org are good.
By the way. How come Rothbard types always blame the Fed for just “paying off government bills” when seignorage is such a minute phenomenon in the economy?
How come Rothbard strayed so far away from general equilibrium theory of money? Why did he revolt against Mises to such an extent?