The stock market hovers around all-time highs, and right on cue, individual investors are starting to get back into stocks. They are tired of earning nothing in money market funds or bank CDs. Ben Bernanke’s zero rate siren song has enticed reticent investors ashore all in the name of stimulating the economy and putting people to work. Savers be damned, and the rocky cliffs await.
The Fed’s easy money hasn’t created employment or prosperity (record numbers are still on food stamps), but it has juiced up the stock and bond markets, as well as farmland prices and the art market.
Does it have to be this way? Must we endure this asset price roller coaster put in motion by the Ph.D.s at the central bank to jump-start the American dream? Should accumulating and protecting wealth be, as John Maynard Keynes called it, a game of snap, where the object is to have a chair when the music stops?
Harry Veryser doesn’t think so. He reminds the reader constantly in his new book It Didn’t Have to Be This Way: Why Boom and Bust Is Unnecessary — and How the Austrian School of Economics Breaks the Cycle that if policymakers would just study and embrace Austrian economics, we could stop all this nonsense.
The author, an economics professor at the University of Detroit Mercy and businessman, says he’s wanted to write this book for 20 years. The financial crash of 2008 gave him the real-world reason to explain the Austrian School of economics.
He hopes Austrians will be taken more seriously in light of the crash that some of them predicted. Not likely. Nobel Prize winner and New York Times columnist Paul Krugman wrote just this past February, “Austrian economics very much has the psychology of a cult.” Since hyperinflation hasn’t come to pass, as some Austrians had predicted, given government’s huge deficits and central bank growth, Krugman figures their argument is lost and they should shut up already. Instead, the lack of prophecy “only strengthens the determination of the faithful to uphold the faith.”
The hyperinflation call hasn’t done the Austrians any favors, but the Keynesians surely don’t have anything to brag about. It’s not like Fed chair Ben Bernanke stays awake reading Human Action. He’s a card-carrying Keynesian, and proud of it. He may not be Keynesian enough for Krugman, but who could be?
Veryser divides his book up into three parts: “Warnings Ignored,” “How We Got Here,” and “A Reconstruction of Economics.” The author immediately takes mainstream economics to task for its misguided emphasis on mathematics, economic modeling, and attempting to be a hard science.
The financial crash exposed the Achilles’ heel of modeling, and Veryser provides a personal anecdote to illustrate the pressure university economics departments are under to teach the current mainstream gospel. One of his deans criticized his department for lack of rigor, and said the department should be teaching financial engineering. The dean explained that financial engineering, for instance, could turn questionable debt into AAA paper with the use of modern statistical tools. We all know how that turned out.
The author provides a chapter called “A Short History of the Austrian School.” Despite the chapter being brief, Veryser chooses to highlight some relatively obscure Austrians. Friedrich von Wieser, Frank Fetter, William Hutt, Wilhelm Röpke, and Richard von Strigl are not household Austrian names. For those unfamiliar with the Austrian School, this is a particularly useful chapter.
It wouldn’t surprise Mr. Krugman that there is plenty in Veryser’s book about inflation. Printing more money isn’t the innocuous policy tool Keynesians treat it as, but is a form of taxation most Austrians believe is theft. Pre-Federal Reserve, the United States enjoyed a hundred years of no price inflation. Once the central bank was created and WWI was funded, prices exploded around the world. The Fed’s money creation and the general price level have only gone up since the central bank has been in business.
Inflation in the United States has been relentless, but nothing like Weimar Germany in the early 1920s, when employees were paid twice a day and it took 10 million marks to pay for a modest lunch. Streetcar fares would go up each day at 6 p.m. The hyperinflation destroyed the middle class and brought Hitler to power.
The current Fed chair only dreams about such price increases; it’s deflation that keeps him awake. “Deflation,” Veryser writes, “in essence, is a collapse of bank portfolios.” Again, this is why Bernanke frets about deflation. His main job (forget about maintaining a strong dollar and full employment) is to keep the banks open for business.
Along with the insights like Austrian business cycle theory, the author brings to light a valuable point you don’t read often. The much-maligned Jimmy Carter inherited the Nixon/Ford inflation and actually did something about it. He appointed Paul Volcker as Fed chair, but more importantly, he deregulated a number of industries like the airlines, railroads, and trucking. Yes, flying is a pain, but thanks to Carter, most everyone can afford it.
In the final third of the book, Veryser goes back to basics. Basics that many who have taken only college econ courses are never taught. For instance, the importance of the division of labor. The author quotes Spy Briefing’s own Jeffrey Tucker, who calls the division of labor “an essential part of the case for freedom,” and “probably the single greatest contribution that economics has made to human understanding.”
The founder of the Austrian School, Carl Menger, offered the keen insight in 1871 that specialization leads to advances in technology that benefit everyone, not just those who develop the technology. Wilhelm Röpke explained no dictator can determine what goods should come to market. Only market participants can make those complex decisions.
Modern Austrians like Roger Garrison and Spy Briefing author Mark Skousen are also noted for their contributions in Austrian macro theory.
A couple things in Veryser’s book strike me as curious. In one part of the book, he makes the valid observation that the government watered down the gold standard (in 1945 and 1968), allowing the Fed to create money and inflation. Then, a few pages later, he writes the Austrian School has advocated for the gold standard “as the way to ensure a sound currency, free from government manipulation.”
In another spot addressing fractionalized banking, he writes, “If a bank has deposits of $1 million, it may feel safe in lending out $10 million.” Change “deposits” to “capital” and that statement is correct. However, a single bank could increase its loans to that extent only if the loan money stayed in that particular bank, increasing the deposits at the same time, which is highly unlikely. Deposits can be multiplied in the entire banking system by 10 times, but not by a single bank.
These are minor quibbles for a book that is praised on its back cover by the likes of Ron Paul, Lew Lehrman, Mark Skousen, Larry Reed, and Tom Woods. This book covers an extraordinary amount of ground, from basic sound economics to economic history. The author is not only skilled at teaching economics, but has real-life business experience in the auto parts business. This rare combination of experience and talent makes the author unique among economics writers. It Didn’t Have to Be This Way is a valuable addition to any bookshelf for its breadth, soundness, and clarity.
Sincerely,
Doug French
