Not interfering with the market's adjustment process is simply allowing Schumpeterian "creative destruction? to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example. So while 'laissez faire' would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan's zombie banks from the 1990s is still fresh, but ignored in the west.
Rothbard identified the ways in which government can hobble the adjustment process:
1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further..
2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments which, in their turn, will have to be liquidated in some later depression. A government's "easy money" policy prevents the market?s return to the necessary high interest rates.
3. Keep wage rates up..
4. Keep prices up..
5. Stimulate consumption and discourage saving.. more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further.
6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance", relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.
An iatrogenic illness is one caused by the doctor himself. The economies of the west now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which are more likely to do harm to the patient and prolong the recession.
David Fuller's view This is one of Tim Price's best-ever issues, in my opinion. I commend it to you.Back to top