Black Hole or Shock Absorber: How Does a Free-Market Economy Respond to Crises?
Mainstream economists view the economy as fickle, unstable, and always in danger of utter collapse. They see the outlook as very bleak if not for the enormous existing superstructure of government intervention, including constant stimulus of “aggregate demand.” In their minds, this essential stabilization would also include the existing intricate arrangement of regulation and restriction, the army of technocratic bureaucrats overlording every market, and the rollout of massive interventions and macro stabilization schemes, whenever necessary.
This bureaucratic view is predicated on the assumption of the superiority of technocratic ability, “scientific” knowledge, and centralized resources. It is a view that is only plausible when combined with the supposed inability of individual actors to foresee such events or to respond to events, especially those deemed beyond their control. In addition to ignoring government intervention as the cause of crises, this top-down view is incorrect and is directly at odds with reality.1
In contrast, Austrian economists see the free market as highly stable and quick to adapt to changing circumstances, including huge macro destabilizing events such as hurricanes, wars, famines, and pandemics. Here, the crisis is the inevitable result of government intervention, although natural disasters are not ignored.
This bottom-up view is based on an understanding of the interests and ability of entrepreneurs to respond to events, minor and major, to improve their situation and indirectly to “stabilize” the economy. Individuals can respond to even dramatic changes in supply and demand conditions. They respond to crises as consumers, laborers, managers, and entrepreneurs, as well as communities, churches, civic groups, family members, friends, and neighbors, but all can be paralyzed or incapacitated by the top-down policy approach.
Without describing the process of how the free-market system works and without the benefit of any real-world experience, the decision of what approach to choose is a coin toss. In a world in which education, the media, and the government all side with the top-down government approach, it will win the public opinion coin toss by default—after all, something must be done! The purpose of this article is to explain how the anarchy of individual actions works to buffer the economy like a shock absorber.
The Black Hole of Economics
It is hard to explain and understand how mainstream economists think about economic crises, because they have written so little about how the economics of the crisis works, per se. Their bogeyman is deflation. They see deflation, in the form of falling prices, to be like a black hole. If the economy gets near deflation, it will be sucked into the black hole and never be able to emerge again. I have coined the term apoplithorismosphobia to describe their psychological problem and my article on the same subject should be sufficient to describe the manifestations of the phobia and its tragic results. Ben Bernanke has deflation-phobia and so does Paul Krugman so it is safe to assume the fear is widely spread.
Their credibility is unmasked by the fact that the biggest direct losers from deflation are the wealthy political elites and crony capitalists. Everyone will get some kind of “haircut” during the process, but the big losers are mostly the same people who benefitted from the corrupt system that caused the crisis in the first place!
The enormous unmentioned benefit of this deflationary/crisis process is that we might be able to break free from paper fiat-money inflation, the “regulated” fractional reserve banking system, exploding government debt, and the Fed itself! Obviously, the rank-and-file citizen would benefit from the completion of this process.
Free-Market Shock Absorbers
The traditional vehicle suspen
Article from Mises Wire