Gulag Blog

For “new economics,” look to old economists

When it comes to managing the business cycle, mainstream economics have failed rather spectacularly, their prescriptions leading to increasingly violent bubbles and busts. For this reason there have been calls for a “new economics.” To get there, perhaps we just need to rediscover forgotten economists like Hyman Minsky and Ludwig von Mises.

I was intrigued by an article by Mark Whitehouse in the Wall Street Journal last week. He described how concepts like “leverage” and “collateral,” crucial to understanding credit and commonly discussed by financial economists, remain foreign to mainstream economics.

These are concepts that Minsky understood as far back as the ’60s. His Financial Instability Hypothesis precisely describes the credit bubble and bust we’ve just been through.

Today Minsky is more frequently discussed in investment circles, but his ideas remain largely ignored by academic economics. And they certainly don’t inform policy.

Then there is Mises, who Mark Spitznagel writes in this weekend’s Wall Street Journal “predicted the depression” yet remains totally ignored by the mainstream: “How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?”

Most likely so, since Mises is generally dismissed as a “sound money” quack.

My favorite forgotten economist is L.M. Holt, who described the debt deflationary theory of depressions in 1897. (For easier reading, I retyped it.)

Irving Fisher, who is credited with that theory thanks to a paper published in 1933, only came to it after being crushed, financially and intellectually, by the Great Crash. (Days before it he declared that stocks had reached “a permanently high plateau.”) Had Fisher read Holt, he might have understood that the market peak was a debt-financed mirage.

Instead of learning from Fisher’s mistake, economists are repeating it, advocating the inflation of a new public debt bubble to replace the private one that just burst.

This is unfortunate. If mainstream economists had the intellectual honesty to admit that their theories don’t properly account for debt, if they gave “fringe” thinkers like Minsky and Mises a fair hearing, we might discover the “new” economics that has been under our noses for a hundred years.

Tags: LM Holt, minsky, Mises

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