Friedrich Hayek and Ludwig von Mises

Jeffrey Tucker points out that the Austrian economists Hayek and von Mises explained long ago in the 1930s why the Keynesian policies of credit expansion being used today to try to bring about recovery would not be effective in restoring prosperity then or now.

Did you ever have the feeling that we’ve been through this before?

Think of it. Those in charge have only recently sworn — yet again! — that if we keep interest rates at zero, keep battling the symptoms of recession and unemployment with spending and jobs programs, clobber the speculators with regulations, and otherwise keep trying to revive moribund industries, all will be well. Just don’t cut government spending or let interest rates rise!

So where have we heard it all before? It was the 1930s, when the battle between F.A. Hayek and J.M. Keynes raged in the English-speaking world, not only in the academic journals but in the newspapers in London and the United States.

Hayek gave a series of lectures based on his previous works in German that tried to explain that the ruling elite and their theoretical apparatus had it all wrong.

In a thousand different ways he said the same thing: “To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about.”

Further, “because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.”…

Ludwig von Mises wrote in 1931:

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.