“i’m going to put my neck on the chopping block here as i have yet to read rothbard’s america’s great depression or even half of the article here. but one of the causes of the great depression, as has been explained to me, was that manufacturers assumed the market for “common goods” could not reach a glut. for example, that a tea pot manufacturing company could keep manufacturing tea pots at a very fast rate and someone (the common people) HAD to buy them. however, across the given time domain, eventually everyone who wanted a tea pot had one and the market for those tea pots was satiated. so tea pot co. kept lowering the price of their tea pots to entice more sales, but eventually even the price of zero was not sufficient to make people take tea pots.”

Let us not forget innovation and market research. Manufacturers are not stupid. They read the market and decide if they continue manufacturing tea pot or phase them out and phase in tea bags.

Let us not forget innovation and market research. Manufacturers are not stupid. They read the market and decide if they continue manufacturing tea pot or phase them out and phase in tea bags.

in an “undersocialized” (to borrow from the sociological / granovetter camp) sense, i agree. however, i seem to recall that the general “herd” mentality of manufacturers and factory owners at the time were relying on (commonly held though innacurate) economic models that the only goods worth mass-producing were “basic goods” for the “common people” and that the market for those goods by “the common people” was insatiable. from a more “socialized” perspective, basically too many of these all-too-human manufacturers confronted the market too stubbornly, resulting in (rightful, corrective) failure. but these mass failures of manufacturing begat the cascade of stock devaluation / correction, through credit contraction.

manufacturers aren’t stupid, nor are they “oversocialized” sheep. but they are limited by bounded-rationality, at that time in a social context of increasingly blind faith in over-planning and brittle organizing.

sadly, human history suggests that knee-jerk reactions are to “fight fire with fire” — people reacted to the problems created by insufficient market diversity by trying to eliminate the market all together. and we all know to some degree how well that worked out; though largely people still haven’t shaken that notion of faith in “a strong man who can make a plan work“.

Marco,

There are numerous reasons why private fiat money could never be workable. As to your claim that the “first receivers” would be the local people issuing their own fiat money, that is equally absurd to the idea that “Americans” are the chief beneficiary of any new issue of dollars. There will always be groups that benefit more than others.

Further, locally issued fiat money can only serve to promote local autarchy, reducing the division of labor. I can hardly cite this as a positive.

Also, with private fiat money there is the introduction problem. How do you get people to first accept these private fiat notes? The only way that has worked in America is the pegging of these notes to the dollar permanently. All this does is create local inflation, and hurt the businesses that accept the local fiat currency at par. And unless the notes are actually 100% redeemable (and there is thus, no reason for there issue), there is always the lurking possibility of a crash of the local fiat money.

The largest problem is returning to the gold standard is not “who owns the gold?”, but rather who will accept your gold as payment. I would have not trouble converting all my cash to gold.

Recessions are about malinvestment, not overinvestment.

does continuing to manufacture “tea pots” (say, 1000 per day) as market feedback prices them as approaching zero, not constitute malinvestment?

though i’m not actually sure what the differentiation with “overinvestment” is… i’m saying that overproduction of a specific good represents a malinvestment, which can cause a depression/recession. and this malinvestment was based on a false but popular notion that “there will always be a market for more tea pots”.

I wrote: “Recessions are about malinvestment, not overinvestment.”

zuzu: “does continuing to manufacture ‘tea pots’ (say, 1000 per day) as market feedback prices them as approaching zero, not constitute malinvestment?”

It is perfectly normal and expected in a free-market economy that at some point some producer somewhere will overestimate the demand for a specific product at a specific price. Recessions are characterized by a cluster of errors. The interesting thing is that these errors are not economy-wide (as the Keynesian explanation would dictate).

Through a complicated mechanism, money is created out of thin air. Think about who gets to spend this money first, and what they will spend it on, and you’ve identified the places in the economy that will suffer from “overinvestment.” It is possible fore this overinvestment to be as focused as tulip bulbs or real estate, but the point is that this “overinvestment” comes at the expense of underinvestment in other parts of the economy. The Great Depression was characterized by high unemployment in such capital-intensive industries as construction, but less capital-intensive consumer-oriented industries didn’t suffer nearly as much unemployment. This is documented in Rothbard’s book “The Great Depression.”

‘Keynes did not teach us how to perform the “miracle … of turning a stone into bread,” but the not at all miraculous procedure of eating the seed corn.’

Very nice conclusion to an informative article.

But didn’t Keynes in theory want to store additional feed corn during fat times and eat seed corn during lean times? Of course the former is alost never practiced by governments. And note that all of the corn used by governments to implement these policies is stolen. (Individuals and voluntary organizations didn’t need Keynes to invent common sense saving and spending patterns.)

Yes: “But didn’t Keynes in theory want to store additional feed corn during fat times and eat seed corn during lean times?” That was the icing on the cake. Keynes provided a beautiful “scientific” argument for government fiscal and monetary intervention (void of any actual science, of course). But the pretext wouldn’t be complete without arguing that in good times, money should be with-held by the government. I’m guessing he realized that governments would pay more attention to the spending side of his writings than the other. But it worked out well for him and the governments just the same.

“smith was wrong and keynes was right. go and ask any unemployed about the assumption of voluntary unemployment. there is nothing called voluntary unemployment.”

That’s just wrong. People quit their jobs to go back to school, to raise children, or to devote all of their time to pursue better jobs, among other reasons.