Reviving Free Market Economics

The greatest burst of spending that the federal government ever undertook has, conversely, generated a renewed interest in free market economics in some very surprising quarters. Specifically, the pioneering Austrian school of free market economics is experiencing something of a renaissance.

“Paul Krugman and Brad DeLong, two prominent ultra-Keynesians, now felt compelled to learn about and try to refute the Austrian theory of the business cycle,” Joseph T. Salerno and Jeffrey Tucker write in the April 2010 issue of The Free Market newsletter. “Other macroeconomists such as Lee Ohanian of UCLA were inspired to reexamine the historical record and found that [Murray] Rothbard was right about the causes of the severity of the Great Depression.”

Salerno is an economist at Pace University. Tucker edits the Free Market, a publication of the Ludwig von Mises Institute, named after one of the premier Austrian economists.

“My analysis also provides a theory for why low nominal spending—deficient aggregate demand—generated such a large depression in the 1930s, but not in the early 1920s, which was a period of comparable deflation, but when industrial firms cut nominal wages considerably,” Ohanian wrote in the Journal of Economic Theory. “In the absence of Hoover’s program, my analysis indicates that the Depression would have been much less severe.”

“The 1930s would have been a substantially better economic decade had the government not adopted programs that artificially raised real wages in industrial labor markets and prevented those markets from clearing.”

The recent financial crisis brought about the second revival of this Austrian economic theory which has grown ever more popular throughout the past couple of years. Nevertheless, although economic indicators indicate that the increased government spending and control of the economy has not led to a recovery, the advocates of stimulus packages and government bailouts have gone further into the archives to unearth even more radical proposals.

“One such proposal is inspired by the monetary crank Silvio Gesell, who Keynes once called a ‘strange, unduly neglected prophet,” Salerno and Tucker recount. “The modern version of Gesell’s plan calls for a tax on the public’s bank deposits and currency holdings as a means of driving nominal interest rates below zero and thereby stimulating total spending.”

“Silvio Gesell (1862-1930) pioneered a version of the market economy that was about competitive entrepreneurship but not about capitalism,” according to the American Journal of Economics and Sociology. “The financial interests of the hoarders of scarce bank financing and those leveraged with speculative land dealings were to be sacrificed for the greater good of a nation of free and enterprising men and women.”

“Gesell was a radical reformer and quite a famous one, having received more than a respectful mention in John Maynard Keynes’ The General Theory of Employment, Interest, and Money. Keynes dubbed Gesell a non-Marxian socialist.”

“But the projects that have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer’s doomed Bavarian republic,” George Monbiot wrote in The Guardian early last year. “He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency.”

“To discourage people from hoarding it, they should impose a fee (called demurrage), which has the same effect as negative interest. The back of each banknote would contain 12 boxes. For the note to remain valid, the owner had to buy a stamp every month and stick it in one of the boxes. It would be withdrawn from circulation after a year. Money of this kind is called stamp scrip: a privately issued currency that becomes less valuable the longer you hold on to it.”

The Mises Institute has provided information on the Austrian Theory of Economic Monetary policy on the web for all to explore.

Ben Hogan is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.