What Causes Economic Depressions?
In his testimony before a congressional committee in 1930, American Communist Party leader, William Z. Foster, declared: “What is the cause of this starvation, misery and hardship of the millions of workers in the United States? Is it because some great national calamity has destroyed the food, clothing and shelter available for the people? No, on the contrary. Millions of workers must go hungry because there is too much wheat. Millions of workers must go without clothes because the warehouses are full to overflowing with everything that is needed. Millions of workers must freeze because there is too much coal. This is the logic of the capitalist system . . .”1
This statement, made at the beginning of the Great Depression of the 1930s, typifies the widespread view that, in the absence of government intervention and regulation, free-market economies are inherently unstable, lurching from boom to bust, from inflation to unemployment. But is this really true? Not according to the great 20th century “classical liberal” economist Ludwig von Mises,2 who was one of the few economists to predict, in the 1920s, the coming of the Great Depression, and who had been similarly prescient regarding the great German hyperinflation and collapse of 1919-1923. In fact, von Mises, and, fellow “Austrian school” economist and Nobel prize-winner, Friedrich A. Hayek3 argue that it is precisely government mismanagement of the monetary system and government controls on production and trade, which are responsible for boom-and-bust cycles and prolonged depressions.4
Like so much of economics, the “Austrian school” views are complex, but in a nutshell they maintain that in a free-enterprise economy—with free competition, open markets, and freely moving prices and wages—prices send crucial signals, telling businessmen what to produce, counseling workers where to offer their labor, and influencing what people consume. In this way the supply and demand for goods and services in all different markets (including the market for labor) tend to balance each other continually. In addition, the search for profit and the pressure of competition encourage entrepreneurs to forecast the future conditions in their respective markets correctly. For these reasons, there cannot, in normal circumstances, be a general overproduction of goods and services and hence a general slump in business activity.
What then causes boom-bust cycles like the Great Depression? The “Austrians” blame the government, charging that state-induced inflation, brought about by an excessive increase in the quantity of money and credit by state-controlled central banks, skews important market price signals. As a result, rising prices and asset values fool businessmen into making investment decisions not sustainable in real terms. Eventually and inevitably, confidence collapses, businessmen stop investing, and there is a major slump in business activity. The result is widespread unemployment of labor and resources.
Furthermore, they argue, once the “drug” of inflation has been removed, a slump will be corrected most quickly if prices and wages are allowed to freely adjust downwards, back to what true market conditions demand. Governments and unions may attempt to alleviate the pain of the depression through official controls over prices, dividends, wage rates, and through guiding production and investment decisions, but this, say the Austrian economists, will only artificially and unnecessarily prolong it—as happened in the 1930s.
It is odd that many who would not trust the national government to “fine tune” families, schools, and churches would applaud state attempts to tinker with the market. And this despite clear evidence that such tinkering undermines market stability and robs businessmen of the necessary confidence to commit capital for long-term investments.
Footnotes:
1
Clarence B. Carson, The Welfare State 1929-1985, in A Basic History of the United States, vol. 5(Phenix City, AL: American Textbook Committee, 1986), 10.
2
See Ludwig von Mises, The Theory of Money and Credit (New York: The Foundation of Economic Education, 1971). This was first published in German in 1912 and in English in 1934. See also (for a more popular audience) von Mises, Planning For Freedom, 3rd edition(South Holland, IL: Libertarian Press, 1974).
3
Friedrich A. Hayek, Prices and Production (London: G. Routledge & Sons, 1931), and Monetary Theory and the Trade Cycle (New York: Harcourt, Brace & Co, 1933). See also Murray Rothbard, America’s Great Depression, 3rd edition(Kansas City: Sheed & Ward, 1975) and (for a more popular audience) For A New Liberty: A Libertarian Manifesto, revised edition(New York: Collier Macmillan, 1978), chapter 9.
4
See also von Mises, Haberler, Rothbard, Hayek, The Austrian Theory of the Trade Cycle and Other Essays, in Occasional Papers Series 8 (New York: Center for Libertarian Studies, 1978). A similar view is held, for slightly different reasons, by the monetarist economist Milton Friedman. See Milton Friedman, and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (New Jersey: Princeton University Press, 1963); and Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), chapter 3.
Okay, I'll admit it. I used to think that that tax refund check that came in the spring of the year was pretty sweet. After all, it did seem like "free money" or a "big bonus." But then I learned the truth: it was always my money. I had just "given" too much to the federal government in the form of withholding from my paycheck! Not a wise way to manage the money that God Himself gives.
I know many people think that the tax refund check is pretty sweet. After all, they can use it to pay a bill (We see this quite a bit with our day school and back tuition payments.), to spring for something special (like a new TV or computer?), or just plain to think that they got lucky and won some kind of lottery.
Actually, the truth still remains: that money has always been yours. If you're getting a sizable "refund" from Uncle Sam's IRS, then you're loaning too much to Uncle Sam in the first place, and not getting any interest back for your "generosity." Wouldn't you rather use your money yourself, rather than let government bureaucrats and politicians decide how "best" (Do I hear pork calls and sounds of earmarks?) to use the money that God gives you to manage?
Here's a series of helpful articles over at MoneyPlan SOS - Financial Coach that helps understand the problem with withholding too much, receiving too big a tax refund, and how to correct the problem:
It's no secret - the RAsburry household has thoroughly enjoyed being completely debt-free for the past 8-9 months (that is, out of debt, no credit card payments, owe no one any money, not making credit card companies rich and making the family poor - How sweet it is!). And it's no secret - I highly recommend the get out of debt plan taught by Dave Ramsey and his "Financial Peace University." What a blessing these have been!
It looks like someone else has been rather taken by Dave and his approach to managing money and having financial peace. Check out "MoneyPlanSOS," both a website for services and a blog.
But I especially like the notion of eschewing the labels of lower, middle, and upper classes - along with the constrictions and/or expectations that normally go with such nebulous labeling. From now on, no matter how much money I have or don't have, I'll proudly throw my lot in with "The Other Class."
"Honor the Lord with your wealth and with the firstfruits of all your produce" (Prov. 3:9)
"One pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth." (Prov. 13:7)
With the economy in a slow down/recession/depression/crisis (or whatever other term we want to lob in there), those who lose their jobs certainly need our prayers.
However, it would also appear that our politicians *really* need our prayers. You see, their math is not so great when it comes to the economy. And *they* are the ones charging to our economic rescue? Get a load of this clip from House Speaker Nancy Pelosi:
Losing 500,000,000 jobs per month?!
Perhaps it was a slip of the tongue? Perhaps it was a miscalculation by a Ms. Pelosi staffer? Perhaps just one, two, or more zeroes were accidentally or subliminally added in during the Q & A? Or perhaps a comment like this is really intended to gin up more panic, fear, dread, and worry than the American people already have regarding the economy? Or perhaps it's just another line to stir up the so-called urgency for "Nanny Government" to swoop in and take control of more of our economy and more of our daily lives?
Some commentators today have tried to work the math upward. One blogger said, "If that's the case, I guess we’re on pace to lose 6 billion jobs this year." Um, isn't that closer to the population figure for the whole world?
I submit, though, that we must do the math downward, in the other direction, as it were.
The simple truth is this. According to the CIA website, the U.S. population stands at a mere 303,824,640 (July 2008 est.). Yes, you read that correctly. The whole population of the United States, as estimated last summer, stands at just over 300,000,000. That's only about 60% of Ms. Pelosi's figure for a month's worth of job losses.
If Ms. Pelosi's figures are correct--and how many unthinking fellow citizens in our land will assume just that?--then we will all be out of work not within a matter of a month, but rather in just under three weeks. (Hmm. I wonder how we should count those already retired and not even seeking employment?)
So, let's of course pray for those who have lost their jobs as well as those who may/will lose their jobs in the coming weeks and months of hardship. But let's also be discerning and vigilant regarding what our politicians try to tell us ... and let's pray for them. After all, it would appear that the wisdom requisite for leading our nation is in rather short supply these days.
Most of all, as Christians let's also not panic or join in the ever-present hand-wringing sessions over our economic doldrums these days. You see, such circumstances may very well have a God-given and salutary silver lining. We just may get to see how God Himself, not we ourselves nor the government itself, will provide for our every need, and with less stuff and economic "bling" than we think we may "need." And we just may get to see that Father, Son, and Holy Spirit are really the true source of all of life.
The Lord Jesus said: "Therefore do not be anxious, saying, 'What shall we eat?' or 'What shall we drink?' or 'What shall we wear?' For the Gentiles seek after all these things, and your heavenly Father knows that you need them all. But seek first the kingdom of God and his righteousness, and all these things will be added to you." (Matthew 6:31-33)
St. Paul said, "Rejoice in the Lord always; again I will say, Rejoice. Let your reasonableness be known to everyone. The Lord is at hand; do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God. And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus." (Philippians 4:4-7)
The psalmist said: "Put not your trust in princes, in a son of man, in whom there is not salvation. When his breath departs he returns to the earth; on that very day his plans perish." (Psalm 146:3-4)
Prayers for the Unemployed: "Heavenly Father, we commend to Your care those who suffer want and anxiety from lack of work. Grant that the wealth and resources of this rich land be profitably used so that all persons may find suitable and fulfilling employment and receive just payment for their labor; through Jesus Christ, our Lord." (LSB, 317)
"Heavenly Father, during His earthly ministry, Your Son had nowhere to lay His head. Look with pity on those who seek work but are unable to find any. Of Your tender mercy raise up opportunities for employment that in peace and thankfulness they may earn a juge wage, serve their neighbor in love, and find the contentment that You promise; for the sake of Him whose poverty we are made rich, even Jesus Christ, our Lord, who lives and reigns with You and the Holy Spirit, one God, now and forever." (Pastoral Care Companion, 452, adapted)
Prayer for the Nation: "Almighty God, You have given us this good land as our heritage. Grant that we remember Your generosity and constantly do Your will. Bless our land with honest industry, truthful education, and an honorable way of life. Save us from violence, discord, and confusion, from pride and arrogance, and from every evil course of action. Grant that we, who came from many nations with many different languages, may become a united people. Support us in defending our liberties, and give those to whom we have entrusted the authority of government the spirit of wisdom, that there may be justice and peace in our land. When times are prosperous, may our hearts be thankful, and in troubled times do not let our trust in You fail; through Jesus Christ, our Lord." (LSB, 313)
Yes, I'll admit it: the economy is on my mind a lot lately. As do many, I wonder what's going to happen next, what it will mean for people's retirement, what it will mean for all of us in general, from day to day. Are we heading for another recession? A depression? A prolonged depression? Will any of us have any money left, either in retirement funds or in daily operating checkbooks? (No, I'm not trying to sound "doom and gloom"; just trying to echo the thoughts that seem to be so prevalent.)
Mostly I wonder how all of this "economic downturn" may effect the Church, particularly in terms of folks coming to the Divine Service to discover or relearn where their true meaning and purpose in life is, namely, in Jesus Christ and His life and salvation. Difficult economic times could very well bode well for the Church, because, after all, the golden calves of our humming, ever-growing economy and our super-soaring social status based on material wealth sure seem to be biting the dust. Only time will tell, of course, how things will turn out. Only our Triune God and Savior can truly provide for what we really need, regardless of how much money we may or may not have.
In the meantime, perhaps we can learn a little something from history. We might wonder if we could ever get ourselves into another "Great Depression." Some say, "Yes, we could"; others say, "No, we have too many correctives in place these days." But you might be interested in this article from "MoneyNews.com".
According to two UCLA economists (yes, "left coast"!), it would appear that FDR's policies, usually credited with rescuing the nation from the Depression's destruction, may very well have prolonged the early 20th century economic downturn. I had to take a little time to wade through the statistical details in the article, but I also find it helpful to look at this historical event from a different perspective. I hope you will too. Here's the article's concluding paragraph to spur you on to read the whole thing:
"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."
Certainly gives another healthy serving of food for thought regarding our most recent governmental interventions in economic bailouts/rescue packages, doesn't it?
We keep hearing Sen. Barack Obama (D-IL) and his political allies place the mess of the failed Fannie Mae and Freddie Mac--government-run mortgage companies--at the feet of "deregulation." Then, either by subtle insinuation or overt accusation, Sen. Obama and his cronies tell us that those "wascally Wepublicans" (my Elmer Fudd-esque term) are the culprits behind the "deregulation" of Fannie and Freddy.
But who was really trying to warn and regulate and who was truly stonewalling and putting the brakes on regulation? Let their own words answer that:
