Home > Austrian School, Mainstream failure > The UK is killing itself on bad ideas

The UK is killing itself on bad ideas

You’d think mainstream economists and commentators in the UK would reflect on the fact that output has declined 6% during this recession, the worst since the 1950s (possibly the 1930s), on the fact that financial deregulation only a few short years ago may just have something to do with the current recession, on the fact that the Japanese experience proves low interest rates and massive government spending does nothing other than the delay the necessary adjustments the economy needs to get back on track, on the fact that Keynes was an intellectual lightweight whose ideas have wrought destruction in every country (the UK, the US, Japan) where they have been tried.

But no, this piece by Keynesian disciple Robert Skidelsky in Ft.com proves the British establishment learns nothing, and are willing to walk off a cliff rather than admit they are dumber than the local storekeeper when it comes to economics.

Check out this gem:

Even the normally sober Martin Wolf has fallen for this line (FT, December 16 2009). The pre-crisis UK economy, he says, was a “bubble economy”. The bubble made UK output seem larger than it actually was! This is old-fashioned Puritanism: the boom was the illusion, the slump is the return of reality. However, experience of past recessions suggests that, once the corner is turned, output recovers vigorously from slump conditions (as do prices). Between 1933 and 1937 the UK economy expanded by 4 per cent a year, much higher than its “trend” rate of growth. Yet in 1931 orthodox economists were denying there was an output gap at the bottom of the greatest depression in history. 

Based on the wholly fallacious idea that financial deregulation had nothing to do with a false boom (and therefore a bust), Skidelsky looks around, sees the “mad” years of 2000-2007 as “normal” and the adjustment phase after the credit-fuelled boom as the “aberration” and wants to return to normality.

A simple look at credit growth, debt-to-GDP ratios, personal debt levels, and the growth in housing prices and mortgage debt would all irrefutably prove that the UK went through an unprecedented credit-fuelled boom which was completely unsustainable. 2000-2007 was the aberration. 2008-? is the long painful adjustment period, made worse by Skidelsky’s admonitions to return to madness.

Fortunately, the private economy is having none of this, is rapidly reducing its debt levels to stave off mass insolvency, and is leveraging down. 

Skidelsky hilariously characterises this necessary de-leveraging as irrational “money hoarding”:

In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down. 

Err…no.  In a slump, there are fewer speculative opportunities and therefore people stop borrowing.  They sensibly save their money, recognising that borrowing in this environment would be madness.  This “increases” savings (“hoarding” in Skidelsky’s derogatory term), reduces factor prices and eventually allows borrowing to be resumed for profitable activities.

To quote Rothbard (pp. 40-41): 

In their stress on the liquidity trap as a potent factor in aggravating depression and perpetuating unemployment, the Keynesians make much fuss over the alleged fact that people, in a financial crisis, hoard money instead of purchasing bonds and contributing toward lower rates. It is this “speculative hoard” that constitutes the “liquidity trap,” and is supposed to indicate the relation between liquidity preference and the interest rate. But the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the “profit spread” on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate. What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers’ goods prices falling faster than do consumer goods’ prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs… Far from “speculative” hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery. 

For a simpler explanation of the Austrian analysis, look at my five rules for the Ponzi-economy here.

This piece proves beyond a reasonable doubt that some members of the British establishment are literally insane, and are leading the British economy over a cliff.  Why is it that no Keynesian zealot can ever swerve out of the way of an economic obstacle?  They must all be zealot-zombies

  1. December 22, 2009 at 11:32 pm

    great post!

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