Mises Featured in the Journal

November 7, 2009

by Jerry O’Driscoll  

In today’s Wall Street Journal, hedge-fund founder Mark Spitznagel celebrates Ludwig von Mises as “The Man Who Predicted the Depression.”  Spitznagel opens by observing that “Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s.  We ignore the great Austrian at our peril today.”  

Spitznagel deals with The Theory of Money and Credit and does a good job presenting its principal arguments.  What I found most interesting, however, is the author’s argument that the book is a warning today.  There is a lively exchange over at The Austrian Economists, led by Pete Boettke, on whether monetary policy is too tight or too loose.  Spitznagel obviously thinks policy is too loose. So do I. 

Right now there are disinflationary forces still at work in the near term.  Many malinvestments have still not been liquidated. Bad commercial real-estate loans sit on the books of many banks.  All of this maintains downward pressure on asset prices.  

Meanwhile, the dollar has replaced the Yen as the currency of choice for a carry trade that is financing a real-estate boom in Asia, high gold prices and buoyant commodity markets. The Fed is promising near-zero overnight interest rates out as far as the eye can see.  The effects of the easy money have not yet manifested themselves in US consumer prices.  The asset boom will eventually spill over into final demand, though perhaps last in the US.  

In short, the seeds of the next boom and then bust have already been sown.  Spitznagel quotes Mises as saying to his fiancée in mid-1929, “A great crash is coming and I don’t want my name in any way connected with it.”  Words for our time.

11 Responses to “Mises Featured in the Journal”

  1. Pierre Lemieux Says:

    There is however one mischaracterization of Keynes in Spitznagel’s piece. In fact, there is little mathematics in Keynes’s General Theory. Moreover, let’s not forget that Keynes explicitely argues against the use of mathematics in economic analysis: “It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section vi of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.” (General Theory, pp. 297-298)


  2. Dr. O’Driscoll,

    How do you reconcile your easy money view with the fact that even the Fed’s own numbers show essentially no growth in M2 over the last six months?

  3. Mario Rizzo Says:

    All we can say in Spitznagel’s defense is that there are fewer mathematical symbols in Mises’s Theory of Money and Credit.

  4. Bob Murphy Says:

    I’m sorta with Mario on this point. When I read the piece, at first I too was thinking, “Oh jeez, strawman alert,” but I do think the General Theory had a bunch of Greek symbols, right? I am pretty sure I had to translate for my History of Thought kids at Hillsdale. (Yes, I forced them to read Keynes in the original.)

    So my point is that even though a modern economist reading the General Theory might think, “Wow, I’ve seen more equations in the bathroom stall at U of C!” that doesn’t mean the General Theory is void of equations etc., right?

    I distinctly remember Keynes making some argument about Says’ Law and assuming a function was always overlapping some other function and he even had a graph to illustrate his argument.

  5. Bob Murphy Says:

    Wenzel,

    I agree with you that the average person who says “the Fed’s printing money like crazy, buy gold!” doesn’t know what he’s talking about.

    On the other hand, those reserves are money, right? If the banks really wanted to they could spend them on milk couldn’t they?

    Let me put it this way: Isn’t there a way the Fed could have had stable M2 over the last six months, without having propped up all the banks and the real estate market?

    So I think at best we’re seeing that it’s too crude to just say “Fed loose” or “Fed tight.” But surely it’s not correct to say Bernanke is practicing tough love with the financial markets.


  6. The relationship between all empirical measures of money and either prices or nominal GDP broke down in the 1980s; the breakdown occurred just as money-supply targeting came to be accepted. Many factors contributed to the breakdown, but, by the end of the decade, most monetarists had switched their focus to targeting either prices (or their growth rate) or nominal GDP. Despite the best efforts of many fine researchers, no one has been able to re-establish a reliable relationship between money and prices or nominal GDP. At some of the regional Fed banks (St. Louis being one), there have been efforts to re-establish an empirical link using a narrow measure of money.

  7. Nikolaj Says:

    “Many malinvestments have still not been liquidated. Bad commercial real-estate loans sit on the books of many banks. All of this maintains downward pressure on asset prices.”

    Interesting. Horwitz, Boettke, Selgin and other on AE are trumpeting that what we currently see is excessive correction, not insufficient correction, as O Driscol points out, (and as I think it is the case).


  8. There is certainly a lively discussion going on among the parties named by Nikolaj, but I don’t agree with his characterization of their position. It has been an airing of all sides, in which I have participated. I also don’t quite understand what an “excessive correction” would mean.

  9. chidemkurdas Says:

    In the context of a shrinking credit bubble, the issue is whether government policy is delaying necessary adjustment and in the process potentially creating new asset bubbles. If you’ll remember, after the stock bubble started to collapse in 2000 and the economy slumped, the Fed aggressively opened the spigots. That eased the pain at the time and got the interlinked credit & property booms rolling. The Fed was the savior. In retrospect, the policy looks questionable, doesn’t it?


  10. I agree fully with Chidem’s last post, and it has been the subject of a lively debate over at The Austrian Economists. There is no practical way to “reflate” without creating a new bubble. The cycle is shortening. The process will destroy capitalism. Classical liberals must separate themselves from the policy.

  11. chidemkurdas Says:

    Your point about the cycle shortening is a very important insight. While business cycles are not new & there is a history of Central Bank interventions going back a century, aggressively reflationist policies may be changing the historic pattern.


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