How strange it is, then, to see that other Austrians have never denied that government fiscal and monetary policies can increase employment and output.
Take this statement by Huerta de Soto (who is himself an advocate of a most extreme Rothbardian program):
“Under certain conditions, government and union intervention, along with the institutional rigidity of the markets, may prevent the necessary readjustments which precede any recovery of economic activity. If wages are inflexible, hiring conditions very rigid, union power great and governments succumb to the temptation of protectionism, then extremely high unemployment can actually be maintained indefinitely, without any adjustment to new economic conditions on the part of the original means of production. Under these circumstances a cumulative process of contraction may also be triggered. By such a process the massive growth of unemployment would give rise to a widespread decrease in demand, which in turn would provoke new doses of unemployment, etc. Some theorists have used the term secondary depression to refer to this process, which does not arise from spontaneous market forces, but from coercive government intervention in labor markets, products, and international trade. In some instances, ‘secondary depression’ theorists have considered the mere possibility of such a situation a prima facie argument to justify government intervention, encouraging new credit expansion and public spending. However the only effective policy for avoiding a ‘secondary depression,’ or for preventing the severity of one, is to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful, even to the point of making it politically unbearable.First, before I come to my main point, Huerta de Soto is entirely wrong to blame “secondary depressions” solely on government intervention and “union power.” Has this man never heard of debt deflation and subjective expectations affecting the outlook of capitalists? In an environment of high private-sector debt, wage cuts would prove disastrous as the burden of debt soared, which causes bankruptcy to both debtors and creditors. And, in any case, markets lack the reliable equilibrating mechanisms so beloved by neoclassicals and Austrians, for the following reasons:
What should be done if, under certain circumstances, it appears politically ‘impossible’ to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession.
Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:it has, of course, never been denied that employment can be rapidly increased, and a position of ‘full employment’ achieved in the shortest possible time by means of monetary expansion. ... All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reduced wages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above.” (Huerta de Soto 2012: 452–456).
(1) the essential property of all highly liquid assets (with money as the most liquid asset) is that there is a zero or near zero elasticity of substitution between these liquid assets and producible commodities. This means that the gross substitution axiom is false and any acts of spending on liquid assets causing their price to rise will not necessarily induce substitution effects leading to more demand for cheaper producible commodities.But to return to my original point: the crucial issue here is that even Huerta de Soto states that “no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion” – no one, that is, except (apparently) Robert Murphy!
(2) it is unlikely that all markets have equilibrium prices (and even less likely that price setting businesses would be willing to adjust the prices rapidly anyway if they existed). The very notion of an economy with a tendency to general equilibrium, where all product markets converge to market-clearing prices, depends on unrealistic assumptions, such as flexible prices and demand and supply curves behaving with substitution effects in the absence of income effects;
(3) owing to uncertainty and subjective expectations, it is unlikely that shattered expectations of business people will change suddenly to induce the necessary level of investment in a severe recession or depression;
(4) there is thus no guarantee that savings will match investment (even if you assume a loanable funds theory of interest) or that Say’s law is much more than a fantasy;
(5) there is no such thing as some natural rate of interest that will equilibrate savings and investment;
(6) as Keynes himself argued, absence of wage and price flexibility is not the reason why neoclassical theory is flawed: even if we had complete wage and price flexibility, there would still be no guarantee of full employment.
Curiously, Ludwig Lachmann went further than Huerta de Soto and saw public works spending in a depression as a genuinely useful measure:
“In the British situation of 1932, Hayek and his friends rejected the proposals of Keynes and some non-Keynesian British economists – that at the bottom of the depression the government should take certain steps, and so on. Hayek has now realised that that was wrong. That is to say, I think Austrians today would not reject all measures to relieve unemployment and increase employment, in a situation in which nothing really is scarce. And in this respect I think Austrians … would have … have ... learned.”BIBLIOGRAPHY
Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.