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The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression Hardcover – January 1, 2006
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How does Von Mises know the thesis is true? He wants to, and that's it. Nothing in the history of humankind suggests that the "unhindered market" gives optimal results; quite the contrary. How did the European powers get to rule the world? What about the US? What about Japan, South-East Asia and China? Could Austrian economists name a few countries that developed without the contribution of the state? Of course not.
For Von Mises, (nearly) all evils come from the attempt by the state to lower the "natural" rate of interest. The concept itself is dubious at best, as absolutely nothing indicates that a "natural" rate would bring about an harmonious and satisfactory state of affairs. As thousands of years history show, the "natural" rate of interest ends in debt peonage.
About free banking, Von Mises writes:
"banks would have to be especially cautious because of the sensitivity to loss of reputation of their fiduciary media, which no one would be forced to accept. In the course of time, the inhabitants of capitalistic countries would learn to differentiate between good and bad banks. Those living in "undeveloped" countries would distrust all banks. No government would exert pressure on the banks to discount on easier terms than the banks themselves could justify. However, the managers of solvent and highly respected banks, the only banks whose fiduciary media would enjoy the general confidence essential for money-substitute quality, would have learned from past experiences. Even if they scarcely detected the deeper correlations, they would nevertheless know how far they might go without precipitating the danger of a breakdown."
If this isn't blind faith, tell me what it is.
Austrian followers think their masters (Von Mises, Rothbard, etc.) predicted the current crisis. To their credit, Austrian economists do/did understand the difference between what Von Mises misleadingly calls "commodity credit" and "circulation credit". Their concept of "malinvestment", however, is absurd. Austrians believe that an "artificially" low interest rate (promoted by the state of course: left to their own devices, banks wouldn't do such a horrible thing) diverts resources from profitable activities to unprofitable ones. "Bad businesses" appear, which ultimately throw off the market and create a crisis. Behind this process lie two unsubstantiated ideas: 1) market signals guide production in an optimal fashion; 2) in an "unhampered market", all available resources (workers included) are mobilized, so that more money/credit can only divert resources. It's of course impossible to explain the crisis we're in with these two ideas. "Malinvestment" is a hollow concept that doesn't explain anything; as far as I know, Austrian economists don't even try to describe it clearly. Faith, once again: if the market is perfect, then tampering with it can only cause "malinvestment".
And let's not forget that Austrians predicted immediate runaway inflation. What does "immediate" means, exactly? 10 years? 20 years? Clearly, they don't have a clue about what is going on.
This abysmal book is so full of errors/articles of faith that I could write pages about it, but I've wasted too much time already. The more Austrian literature I read, the less it makes sense.