IN A recent article in the Daily Telegraph, Ambrose Evans-Pritchard argued that “policy defeatism is in the air, and Austro-liquidationists are winning the popular debate”. “Austro-liquidationists” is a neat slur, managing to damn Austrian economics as both terrifyingly extreme and stupefyingly technical at the same time. But Evans-Pritchard misrepresents the Austrian school, while also overestimating its influence. Martin Wolf of the Financial Times was equally wrong to write in 2010 that “Austrians also say – as their predecessors said in the 1930s – that the right response is to let everything rotten be liquidated, while continuing to balance the budget as the economy implodes. I find this unconvincing.”
One of the unique insights of Austrian business cycle theory is that excessive credit creation has the potential to induce entrepreneurial errors, and the resulting correction process will be unavoidable and costly. So Austrians do tend to stress the need for malinvestment to be liquidated and are sceptical of attempts to stimulate aggregate demand.
For this reason Austrians tend to advocate a more laissez-faire attitude towards policy, but this does not imply “doing nothing”. On the contrary, there are many important policy ideas that would help this adjustment process: increasing labour flexibility, reducing barriers to investment and reducing marginal tax rates where this would boost revenue are just three examples. The key is that policymakers should allow the business community to lead the recovery, rather than attempting to take their place. The most dangerous risk is that policymakers deem “doing anything” to be better than “doing nothing”, and make policy errors that compound the original problem.
But accepting the necessity of some liquidation and warning against the harm caused by doing too much is not what Evans-Pritchard and Wolf have in mind. They are alluding to the Great Depression, when Treasury secretary Andrew Mellon is said to have advised President Herbert Hoover: “Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate... purge the rottenness out of the system.”
Unfortunately, that doesn’t square with the facts, which demonstrate that it is simply disingenuous to present the Depression as an Austrian plot.
In 2008, the US academic Lawrence H. White investigated these claims. He found that Austrian scholars “did not prescribe a monetary policy of ‘liquidationism’” during the early years of the Great Depression and that in any case the work of the period’s key Austrian economists Friedrich Hayek and Lionel Robbins was not available to the Federal Reserve, who were instead driven by a very different doctrine, known as “real bills”. The quotes of Mellon are derived from Hoover’s memoirs and do not square with Mellon’s public statements – or Hayek’s view that it was harmful to allow a shrinking money supply to drive down incomes. Indeed, many Austrians point to the Federal Reserve’s decision to allow monetary policy to tighten in the 1930s as a chief cause of the length and duration of the Great Depression.
Austro-liquidationists make for alarming bogeymen, but real Austrian policies are more humane and, so far, much less influential. Unfortunately, the truth is so often more nuanced than a good insult.
Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School. www.anthonyjevans.com