Day 6: The cause of, and solution to, all the world's problems (response)

Economic Depressions: Their Cause and Cure, by Murray N. Rothbard, originally published as a minibook by the Constitutional Alliance of Lansing, Michigan, 1969. (summary)

Day 6 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

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Murry Rothbard is, on the whole, correct in his exposition of the proximate causes of the booms and busts of the business cycle. Excess credit causes overinvestment, and since capital investment leads, not lags, consumer spending, the downturn starts with the capital industries. As deleveraging occurs, capital contracts as factories are left idle, worn-out machines are not replaced, workers lose skills and tenure, and new workers are not trained to replace those who die or retire. Eventually, debts fall far enough and the capital base becomes small enough that it starts to pay again to build capital, and another boom starts anew. The problem, of course, with Rothbard's diagnosis is that he doesn't tell the whole story, and his diagnosis, while couched in more neutral and academic language, is just as infantile and nihilistic as Llewellyn Rockwell's anarchism.

If I recall correctly (and I'm no historian), one of the biggest problems the early aeronautical engineers had with their aircraft was control. The amount of lift a wing gives is dependent on the angle of attack, which is a combination of the pitch of the aircraft and the shape of the wing, controlled by the ailerons. Unfortunately, increasing the angle of attack by changing the ailerons also causes aerodynamic forces to increase the pitch of the aircraft, further increasing the angle of attack. So, if the pilot makes a small increase to the angle of attack, the aircraft will pitch up uncontrollably until it stalls, at which point the aircraft will pitch down until it gets enough airspeed and angle of attack to generate lift again. Engineers solved the problem by adding the tail. The elevators on the tail are angled such that in normal flight they generate negative lift. Thus the tail acts to give negative feedback: when the aircraft increases its angle of attack, the pitch increases, which causes aerodynamic forces on the tail to decrease the pitch, providing dynamic stability.

In a capitalist economy, fiat money generated by private banks using fractional reserve banking act like the wings, generating lift; the government (should) act like the tail, providing negative feedback and dynamic stability. Rothbard is right: without the government acting like the tail, capitalist economic growth would be obviously impossible. And Rothbard is also right: when the government does not act correctly to provide its negative feedback effect, positive feedback causes wide swings in the cycle. But having dynamic stability does not make an aircraft trivially easy to fly, and even more so having dynamic stability does not make a multi-trillion person-hour international economy trivially easy to control.

But Rothbard's "solution" is to simply not fly. There are no problems with aerodynamic instability on ground vehicles, and there are no problems with economic instability if we abandon all fiat credit. But of course cars can't fly, and an economy without fiat credit grows very slowly, if it grows at all; it can even contract when the marginal cost of producing gold falls, reducing the overall economic value of the world's gold stock. Abandoning fiat money means abandoning capitalism itself.