Greg Ip missed a major point in his Aug. 21 Outlook commentary, “The new voodoo economics?” One of the core arguments of Austrian economics is that, if the money supply is artificially managed by a central bank — fixing the price of money, as it were — imbalances will crop up in the economy as industries for which there is no greater underlying demand become artificially attractive to investors.
Money flows into these industries, but a day of reckoning arrives — perhaps when the Fed raises interest rates — when people realize that their expectations were unrealistic. In order to get the industry back on an even footing, the “malinvestment” must be liquidated, perhaps through a precipitous drop in prices, so that the good or service is valued properly.
This is exactly what happened in the housing sector over the past decade, and it should surprise no one that the housing industry has not yet recovered. The malinvestment of recent years will have to be liquidated for that to happen, which will require a painful but necessary and inevitable drop in home prices. Republicans — and all Americans — would be well served by understanding the Austrian alternative to Keynesianism.
Kevin Bloomfield, New York
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●Greg Ip showed a lack of understanding of the Austrian school of economics that he purports to criticize. Mr. Ip claimed that Austrians believe recessions are “natural features of capitalism” and that monetary policy cannot fix them.
The second claim is true, but the first claim is not. The Austrian view is that recessions are the consequence of preceding inflationary booms that are themselves caused by expansionary monetary policy. Government central banks are responsible for the monetary excesses that eventually lead to recession.
Expansionary monetary policy not only cannot cure recessions; it is their very cause. Those central banks are not a “natural feature” of capitalism but, rather, were established by governments as a device to raise revenue, often for war, and distort economies for political gain.
Steven Horwitz, Canton N.Y.
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