States Visited

Wednesday, August 5, 2009


"It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that is falsifies economic calculation and accounting. It produces the phenomenon of imaginary or apparent profits... If the rise in the prices of stocks and real estate is considered as gain, the illusion is...manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are."

Wow, that pretty well sums it up, huh? A nice recap of what we are living through. Except its not a recap. It is the writing of Ludwig von Mises. The genesis of his line of thought can be traced to a treatise he published in 1912. Yes, 1912. Almost twenty years before the same series of events led to the Great Depression. It was included as part of a greatly expanded theory and published again in 1940, before finally being published in English in 1949 as part of his magnum opus Human Action.

F. A. Hayek, winner of the Nobel Prize in Economics and Presidential Medal of Freedom, was a student of Mises and a contemporary of John Maynard Keynes. Through the work of Hayek (and others) the theories of Mises and the other "Austrian School" economists were spread around the world. Over the years Hayek and Keynes engaged in several battles of wits and intellectual arguments, yet, Hayek never wrote a review of Keynes' General Theory of Employment, Interest, and Money. Why? The short answer is, in my opinion, that he felt it so poorly reasoned that Keynes would quickly abandon this line of thinking as he had done on a previously published work. "Hayek later regretted that he had not responded after the General Theory was published, but explained (somewhat lamely) that after Keynes had quickly disavowed his Treatise on Money in the face of criticism, he assumed that Keynes would change his views yet again, so why bother?"(1)

So, if there are theories that have historical accuracy, appear to be excellent predictors of future events, and are widely known, why is it that politicians and their intellectual supporters continue to worship at the feet of Keynes and his General Theory of Employment, Interest, and Money when it has proven, time and again, to be horribly wrong?

Guess which one advocates ever increasing command and control by politicians.


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