The New Deal Debunked (again)
It was capitalism that finally ended the Great Depression. It was not FDR's hair-brained cartel, wage-increasing, unionizing, and welfare state expanding policies. It's good to see that the Journal of Political Economy, the University of Chicago, and UCLA are finally beginning to catch up to the libertarian scholarship of Richard Vedder, Lowell Gallaway, Robert Higgs, Jim Powell, and such predecessors of theirs as Henry Hazlitt, John T. Flynn, Murray Rothbard, F.A. Hayek, William H. Hutt, Benjamin Anderson, and others associated with the Austrian School. [full article]
Comments (12)
It's extremely valuable to have a scholar like Thomas DiLorenzo surveying and reporting on current economic literature for signs that the intelligentsia is waking to realize how damaging government intervention is to a free-market economy.
Particularly gratified am I to read Mr. DiLorenzo's proper attribution of fault with "the legislation-induced growth of unionism and government-mandated employment costs." Government coercion is, and always has been, the primary source of imbalance caused by unions.
Thank you, Mr. DiLorenzo, for another excellent article on the contribution of Capitalism to our economic well-being.
V Harris
Published: September 27, 2004 10:24 AM
Great article by DiLorenzo, although I am rather skeptical the "mainstream" economists and historians will finally accept FDR New Deal policies as fraudulent and misguided. They will most likely dismiss the new scholarship and keep ignoring the facts until they either die or suffer Alzheimer's.
Published: September 27, 2004 10:48 AM
After reading the mentioned article, it seems clear that the paper singles out the policy on labor controls-i.e. the Employment Act. That leaves out a great deal of policy (and theory around fiscal expansion), so it "New Deal Debunked" is a bit off. "Labor Controls Debunked" would be more accurate.
And a quick basic question? If Austrian economics has already proved this material, why are non-Austrians having their papers published on already "proved topics." Seems to me the Austrians could advance their cause by at least learning the tools of modern economics, if only to enhance their message.
However that would require isolating ideas and policies, which appears to be a weakness of this school.
Published: September 27, 2004 8:24 PM
bankind,
It does not follow that because Austrians have already proven something, non-Austrians cannot have their papers published on already proven topics. Simply because something has been proven does not mean that other (stubborn foolish) individuals have actually listened. The "tools of modern economics" are all gravely flawed, and are thus of little use to anyone seeking to make a strong logical argument. Simply because a mountain of fallacies may be convincing to the "average economist" doesn't mean that Austrians should engage in such.
Furthermore, Austrians have utilized "mainstream economic methods" (regression, adj-R^2, p-values, and so-on and so-forth). However, unlike mainstream economists, when Austrians utilize these methods, they stress the limitations of them, and emphasize that they do not "prove" Austrian theory, but are merely consistent with it. There are also some hard limitations. No statistical techniques can either prove nor disprove an economic law (economic laws are, properly stated, counter-factual or ceteris paribus; e.g., it is impossible to use statistical methods to either prove or disprove the statement that minimum wage laws will cause unemployment to be higher than it otherwise would be).
For an excellent example of an Austrian utilizing statistical techniques, see:
Evidence Regarding the Structure of Production. Sechrest, Larry.
Published: September 28, 2004 12:02 AM
My point regarding my comment is not per se the issue of mathematics in economics. I've read this site’s literature on the subject and I don't agree with the arguments. My point is that if Austrians are capable of using modern methods of economics analysis, then their discussions will become more influential in mainstream policy discussions. That should be enough incentives to hold your nose about methodological problems to try and chip into that dialogue (which in truth is how most economists I know approach the issue, not as PROOF but as a method of approximation).
However I think that this approach is counter to the entire methods of the Austrian school of thought, meaning the emphasis on broad strokes versus specific and pragmatic policy tools. This critique of the New Deal follows this characterization, whereby the New Deal as a whole is characterized as a failure versus singling out specific policies (which as far as I can tell would begin with the assumption that all regulatory policy is bad). Granted the journal article makes the same errors (as it only takes into consideration 2 years after James Landis’s real strong instrumental developments in 1938).
Most of this is very shoddy framework developments in the Austrian system. For example, noticing information costs as failures markets (great achievement) but then having any policy tools outside of liberalizing market information. I’ll give you a case in point. The SEC regulation on independent auditing (a New Deal institution and policy) by Austrian standards would be wrong, however considering the previous free market evaluation of corporate equity and how poor it was (pre-new deal) and the dramatic increase in investor confidence in information came after the SEC was formed. Investor confidence in market based information was very low post 1929; further liberalization would not have made any improvement.
Granted you can discuss the most recent scandals in corporate accounting, but those problems stem from the GAAP (a decree by an independent, private regulating body) not acting in good faith of public interests—and is resulting in similar increases in government regulation. These issue are frankly too big for mere conceptual frameworks and do require evaluation based on statistical evidence-indeed even regulatory tweaking of the market.
The Austrian methods have such a comprehensive political objective, that any incremental policy that is feasible in the current political environment is beyond this school’s toolbox, and furthermore incrementalism itself is condemned.
I’ve been trying desperately to find some merit in this philosophy, but the complete utopian approach is SO abstract that I can find no practical application in my working environment--consulting economist in a developing country. And I’m very much interested in the types of economic arguments possible beyond libertarian politicking, attacks against mainstream economists, and visionary utopianism.
Published: September 28, 2004 3:44 AM
Whether Austrians use "modern" methods of economic is beside the point. The methodology and epistemology is either correct, accurate, and true or it is not. Adopting "modern" (read: flawed) methods of economic analysis for the sake of "influencing mainstream policy discussions" is the surest approach to fallacy and loss of credibility. It might even be argued that with the advent of the internet the Austrian School (which is really a superfluos label as correct economic theory is correct economic theory and false economic theory is false economic theory) is doing quite well.
Truth is truth is truth. What holds for "broad strokes" must necessarily also hold for "specific and pragmatic policy tools". The statement "the assumption that all regulatory policy is [bad]" has nothing to do with economics. It's a subjective individual reaction to "regulation". Only if your moral standards hold that theft, rape, and murder are "bad" does it follow that "regulation" is "bad". Why is this so?
It is necessarily so because all regulation necessarily at a minimum limits the ability to control oneself and one's property in an environment in which those persons are not agressing against other person, a state of peaceful exchange, free trade. This is the same situation experienced by victims of theft, rape, and murder, and the characteristics of that experience are universally and only experienced by such aggression.
Any deviation from free trade is necessarily economically inefficient. This is so because by definition trade only and always occurs when both sides to a trade increase the subjective wealth. This is the only logical reason trade occurs. If that economic law wasn't true, trade would never occur. Thus, all regulation must necessarily be a failure as it necessarily prohibits the increase in subjective wealth.
Economics is not about short term political feasability, incremental policy, though it can certainly examine such systems. Many take issue with such a system fundamentally and hold that it illegitimate and "bad" because their moral values also hold theft, rape, and murder "bad". In fact, a call for short term political expediency is necessarily a philosophy that holds "might is right" and must necessarily lead to a Hobbesian war of all against all if followed. This is logically uncontestable.
The power that is used to to enforce "regulatory tweaking of the market" must necessarily affect individuals in the same way as murderers, rapists, and theives affect their victims.
Why would one hold that government regulation of auditing is necessarily better than a free market version? In both systems, the same individuals with the same frailties will be responsible for their actions. It should be easy to see that the power of corrupt accounting standards is easier to spread with government regulation as the risk cost of investment is transferred from those who should bear all of those cost to those who are not directly involved in that activity [theft again]. It is necessarily economically inefficient as it prevents the free exchange of goods and information.
The reason you cannot find practical application as a consulting economist in a developing country is likely because you would be killed for pointing out the theft necessarily done by specific individuals against other specific individuals through regulation (the use of power for purposive ends by specific individuals agressively and offensively against other specific individual victims). It's much easier to "go with the flow" and earn an income as a minor consigliore to the mafia thugs in control of the "government". The type of economic arguments possible in such a working environment are the exact same type of economic arguments possibly in a "utopian" free exchange society. They are either true and correct are they are false and incorrect. It's also likely more efficient in the long run to expose the basic underlying fundamental fallacies as opposed to tackling the latest ever expanding implementation at the tip of that iceberg of fallacies. That is the purpose of Austrian economics epistemology and methodology, and the science of human action generally; the elucidation of knowledge.
Published: September 28, 2004 10:06 AM
How "rape" entered four times into a discussion on New Deal regulation I'll never understand. Considering the claims of Wittgenstein being associated with this school of thought, I’d imagine that his emphasis on the importance of language would give credence to tempering the use of a word with such power (and so candidly mind you).
Furthermore, rather than evangelical revelations on your own righteousness, you should look at what I said regarding the GAAP. The GAAP was developed by the FASB (a private entity) which caused so many of the most recent criminal events in the business community. While you seem well versed in philosophy, I’d like a more applicable understanding of this issue by Austrian terms (specifically means to improve equity market information).
What I continue to see is that this school tends to go on more of these proselytizing rampages of “theft, murder, and rape� versus looking at any real life examples. Your statements are so displaced from any real world/experience, which unfortunately is where we must live and work.
So I will make a scenario cleaner for you. You have a limited entry point to government officials to discuss a poverty reduction program to a single remote village currently living on a subsistence level. The project will happen regardless of if you are there or not. What do you say? How do you utilize the Austrian body of knowledge to improve the delivery, impact and sustainability of the project?
You can make any assumptions you want, but please let’s not rape anyone else.
Published: September 28, 2004 12:31 PM
Wouldn't asking an Austrian's input on a government regulatory scheme for "reducing poverty" be a bit like asking the Pope to help implement Islamic law? The situation by definition precludes one having anything useful to contribute (and rightly so).
Published: September 28, 2004 2:18 PM
"New Deal Regulation" and "Projects" and "Poverty Reduction Programs" are loaded seemingly innocuous descriptions of actions of individuals which cloak their violent nature. Where does the money come from to fund those programs? How is it obtained? Do specific individuals drop their voluntarily made contributions off at government offices? What will happen to an individual who does not want his property expropriated by other individuals, even if those individuals call themselves the government, and he attempts to resist his property being taken by force? Freely trading with others is a common every day occurence. Are we to call societies where a man and a woman are free to choose to be with one another "utopian"? Is it "utopian" to peacefully trade money for a good at your local grocery store? Basic free exchange is the normal state of affairs. There are exceptions, big exceptions, to the affairs of human beings whereby free trade does not occur: all of these big exceptions are in 3 general categories: theft, rape, and murder.
GAAP didn't cause any criminal activity whatsoever. GAAP is just a statement of or guidelines to accounting principles. Specific individuals purposively acted for anything to have occured of a criminal nature, let alone be defined as Action or activity. It is beside the point whether GAAP was established by private individuals or individuals working for the government. Intentional fraudulent action must be purposefully done by an individual. Individuals had to purposefully choose to defraud other individuals; those individuals would be likely do so regardless of government laws, proclomations of private standards boards, etc. after conducting their personal subjective evaluation of risk vs. benefit.
In the free market, there is nothing preventing competing accounting standards boards. Ends do not justify means in libertarian philosophy. Austrian economic theory acknowledges that market information is imperfect. This is and would be true no matter what polital system the individual actors were acting in. This is an ultimate given as human beings are not omniscient.
All trade whatsoever only occurs because both parties to the trade increase their subjective wealth. Because of trade, market prices come into existence. Every living acting person potentially contributes market information through their actions of buying and selling or abstaining from buying and selling at certain prices. Thus, this system of free trade provides the greatest amount of information possible (see Hayek, The Fatal Conceit). This is because individuals with localized specific bits of information seek profit (or conversely the limitation of loss) and their buying and selling sends market signals to everyone else through price. This happens quickly and efficiently.
Price is impossible without free trade. If something which is definied as property (person or extended ownership of person through material possession of natural resources or their transformed man-made form) is transferred, but transferred not through trade, then that property has necessarily been stolen, taken through the employment of violent means. This is the real world in which everyone must live and work. No price exists in such relations. Such actions are states of war, non-peaceful, unccoperative relations between human beings.
The best means to improve equity market information and reduce poverty (generally, as if the theif was no longer able to steal he specifically would be poorer) is to maximize free trade. Wealth is subjective and trade occurs because the individuals find themselves subjectively better off having exchanged. Every instance of trade is an instance of increased wealth. Every instance of trade is a market transaction, many of which can send information to many others not directly involved with the latest transaction through price signals; all of these free market transactions increase information flow.
Without government interference through regulation and taxation those individuals living in a single remote village will quickly find their subsistence level increasing to the marginal productivity of labor, and their wage rates will be accordingly so to the benefit others receive from trading for their labor and goods. They will maximize their subsistence level through the absence of violent non-trade interference.
Published: September 28, 2004 2:40 PM
"Wouldn't asking an Austrian's input on a government regulatory scheme for "reducing poverty" be a bit like asking the Pope to help implement Islamic law? The situation by definition precludes one having anything useful to contribute (and rightly so)."
I recently read Rothbard's tribute to Mises on Mises.com and noted that, for much of Mises' career, he consulted to Vienna's government. Admittedly, this was not his first choice for how to earn a living, but that was the best available at the time.
So, to respond to the comment above, it seems to me that an Austrian would do the best he could under these circumstances to promote as many free-market elements into such a program as possible.
Published: September 28, 2004 5:09 PM
bankind,
rtr's post was excellent, and addresses most of the points I would have addressed. One of the nice thing about the Mises Blog is that the opportunity-cost of correcting fallicious economic thinking is "socialized" (jj) among Austrians and libertarians, reducing the burden on any specific person.
What you don't seem to understand is that all States necessarily use coercive violence against their subjects. At the least, in order to be considered a State, an entity must declare itself a territorial monopoly on the provision of protection and justice in its territorial area, and coercively prevent competitition. Furthermore, all modern States impose taxes, which is nothing more than robbery. Most modern States monopolize money, and inflate the monetary supply (which is thievery). Plenty of States have engaged in rape (a notable example is Imperial Japan, where Chinese women were gang-raped by hundreds of men per night during WWII). And, of course, many States have engaged in murder (see Our Friend, The State). Summarily, all States, by definition, necessitate and systematically engage in the initiation of coercive force, and are thus morally unjustifiable.
I would add a few things to rtr's post. Firstly -- and I can see this coming -- is the objection that not all trade maximizes wealth, and that sometimes people are mistaken. This objection would be a red-herring, because the point rtr was making (restated) is this: all voluntary trade* benefits both parties ex ante. This means that prior to a voluntary trade, both parties think that aftewards -- if the trade occurs -- they will be better off; this is the only way voluntary (non-coercive) trade can occur. Now, it is possible that individuals can be mistaken; however, this is not a justification for State-intervention. It is ludicrous to think that men living hundreds of miles away can somehow better run a person's life than he could himself. It is also possible that fraud can occur (in which case, the transaction was not really voluntary), and this again is not something that justifies State-intervention: the free market can deal with these things.
Indeed, one must employ correct economic analysis to understand what State regulations concerning fraud do. What they do is socialize the cost of dealing with fraud; that is, they subsidize individuals who do not engage in due diligence in dealing with fraud. This, of course, leads to more of the very things that the State is (allegedly) trying to prevent: individuals being defrauded. This occurs for the same reason that subsidies to the poor actually create more poverty: in the latter case (poverty), subsidization lowers the "cost" one pays for being poor; in the former case (fraud), subsidization lowers the cost consumers pay for not engaging in due diligence.
A similar analysis correctly explains why regulatory efforts regarding accounting have failed: they socialize the cost of investing from those who should bear them (the specific investors), onto those who shouldn't (everyone else). This, of course, lowers the cost or penalty investors pay for engaging in investment (which would be research) and subsidizes that cost onto everyone else. The result is predictably that investing becomes less and less responsible, with the rapid proliferation of poor accounting practices.
Your understanding of the FASB and GAAP is flawed (not regarding the technical aspects of what the FASB has declared accounting principles to be, but in terms of the FASB's basic nature). Despite superficial appearances, the FASB is not a truly private entity. It is a defacto part of the State. I have tried to correct your errors on this topic in the past, to little avail (unfortunately).
Your analysis of consumer "confidence" in the market during the Great Depression is also flawed. The Great Depression was not brought about by too little intervention in the free market -- it was brought about by, and worsened by, too much intervention in the free market. Namely, it was caused by an enormous amount of inflation (and by inflation, I mean the correct definition of inflation, the expansion of the monetary supply). Now, many argue that there was no inflation in the 20s. This, however, is wrong: the CPI was not increasing; however, inflation is not synonymous with price-level increases (however, the enormous increase in the price-level of the stock-market is certainly a "price-inflation"). Inflation merely means an increase in the monetary base, which causes prices to be higher than they otherwise would have been. That is, if not for the enormous amount of inflation in the 20s, price-levels would have fallen more than they in fact did in the 20s (and of course, there would have been no stock-market bubble).
Aside from causing prices to be higher than they otherwise would be, and redistributing wealth from the productive private sector to the anti-productive government sector, inflation also causes the business cycle. For a brief explanation, see my notes on the topic: Austrian Theory of the Trade Cycle, Austrian Theory of the Trade Cycle II, and Extensions and Applications in Austrian Macroeconomies (for some responses to objections to the ABC). Murphy points out some of the grave problems with aggregate thinking and simplification, such as the fact that malinvestments don't cancel out (as aggregate "thinking" would lead one to believe). For a more comprehensive analysis, see:
On the Manipulation of Money and Credit. Mises, Ludwig von.
Regarding the GAAP and the FASB, I have tried to to correct your flawed understanding of their nature elsewhere (to no avail, unfortunately, perhaps because I was not completely civil). I again refer you to the following articles on the topic, which note that (summarily) our current accounting situation is not free-market:
Regarding your specific scenario:
This is nothing more than stacking the deck. Socialism and wealth-redistribution is not an absolute given that is going to happen no matter what anyone says, argues, or does (under which situation, the best thing that coudl be done would be to council on how to do this in the least harmful manner). However, if we want to reduce poverty, there are many things we can do -- or rather, refrain from doing.
Notice that I did not target these things (aside from eliminating welfare) specifically at the poor. That is because, for example, only reducing the taxes of the poor, or only giving tax-deductions for charitable contributions to anti-poverty organizations would subsidize poverty, creating more of it. I suggest the following articles on poverty:
Finally, I'd like to note that you've mischaracterized DiLorenzo's criticism of the New Deal. He discussed a range of the idiotic policies of FDR. For some more criticism of the New Deal, see:
* In a very specific sense, non-voluntary trade -- e.g., the State mandating that I pay them taxes or be imprisoned -- is beneficial to both parties. The State obviously benefits from revenue; and by paying taxes, I demonstrate that I'd prefer to pay the taxes than to face the only alternative they've presented me with: being imprisoned (and having my money stolen by them anyways). However, this misconstrues the meaning of "benefits ex ante": it means that prior to the exchange, I think that I will be better off afterwards if an exchange does take place; obviously, I think I will be better off if I can keep more of my money -- it is only the bundling of the mandate to "pay taxes" with "otherwise, we'll imprison or kill you, and take your money anyways" that causes me to surrender my money without physical resistance.
Published: September 28, 2004 5:17 PM
bankind wrote: "You have a limited entry point to government officials to discuss a poverty reduction program to a single remote village currently living on a subsistence level. The project will happen regardless of if you are there or not. What do you say??"
Governmental respect for, and enforcement of, individual private property rights is the single most important element in alleviating poverty. If individuals hold clear title and rights to their land, they can borrow, invest, produce and profit. Without private property rights, all else will fail.
See if you can get the government to establish and rigorously enforce individual -- not collective -- ownership rights. If they won't, they're likely not genuinely interested in the plight of the poor.
Property rights is no panacea -- that is, individual ownership won't turn a desert into the land of milk-and-honey -- but it is a necessary component of wealth creation.
Finally, consider that some communities prefer their subsistence living conditions.
V Harris
Published: September 28, 2004 6:56 PM