Book and Bust; B. Anderson

Bill Anderson 800M and BUST IN THE COURSE of discussion about the pros and cons of free enterprise, the subject inevitably seems to turn to the business cycle. Capitalism's critics-and there are many-waste no time in decrying the alleged "in stability" of the free economy, a sys tem that they claim allows a few to garner great fortunes while leaving the masses to lurch from semi-pov erty in good times to squalor in depressions. Notes a business columnist of a major U.S. newspaper: Unbridled supply-and-demand ideas led to great wealth, but also great poverty, in the late 1800s and early 1900s. There Mr. Anderson Is a teacher of social studies at Ross ville, Georgia, Junior High School. He Is the 1982win ner of the Olive w. Garvey essay contest on "The Virtues of the Free Economy" involving a fellowship to the general meeting of The Mont Pelerln Society. were also periods of great economic boom and bust, of which the Great Depression is the best example. The Western na tions grew tired of waiting for supply and demand to work everything out, and along came Mr. Keynes· and his ideas for them to grasp.!

At this writing, the United States is suffering from its eighth recession since World War II, an economic phenomenon that is again leading persons to question the qualities of capitalism. Politicians, believing the nation can be taxed into prosperity, claim it is once again time for the government to "take over" the reins ofthe economy. As an influential U.S. economist has written: We need an increased degree of gov ernment selection of priorities, channel ing of funds in the direction of those pri 0rities and a recognition of a need for 30 THE FREEMAN January some kind of planning by the federal government. Even some members of the corporate community now say that free markets, such as they are in the United States, are not doing the job.2 Economists, journalists, intellec tuals and politicians seem to agree that the free economy is indeed the source of boom and bust, of recession and depression. If the economy is left without the guiding hand of state direction, they believe, the forces of supply and demand will eventually self-destruct, leaving a wreckage of vanished fortunes and massive un employment. And should the econ omy go into recession, they say, the central government should immedi ately launch programs of transfer payments, public works and busi ness bailouts to stem the tide of the slump.

Liberals are not the only persons to advocate such centralized mea sures for dealing with economic downturns. Conservative econo mists all too often accept the busi ness cycle as an inevitable price of capitalism's success and look to the state as a source for minimizing the trauma caused by recession. The public understanding seems to be that the business cycle, in a capital istic economy, is simply a fact of life that cannot be any more avoided than winter in New Hampshire. Discus sion of the business cycle, then, cen ters not on preventing it, but, rather, as Keynes suggested, on using government monetary and fiscal policy to allow for a smooth transition from one end of the cycle to the· other. The Great Depression When the causes of business cycles are discussed, the subject is usually the Great Depression from 1929 to 1941 (although diehard believers in Franklin D. Roosevelt insist the depression ended in 1933 with FDR's ascension to the Presidency). Yet, the Great Depression had similar char acteristics to the so-called panics or crises that had occurred in the United States and abroad in the previous century: a period of boom-accom panied by inflation-then a sudden and violent bust with prices and wages dropping quickly and banks and other businesses going belly-up.

Because the boom-and-bust peri ods in American history have had such similar features, it would seem best to study the general causes of those economic phenomena rather than to concentrate on only the Great Depression. However, since it took far longer for the U.S. economy to work its way out of the slump in the 1930s than it had in previous bad times, this essay will also look at what set the Great Depression apart from its predecessors, along with ex amining the business cycle since World War II. In examining the stated causes of the business cycle, one finds two ex planations that stand out. The first 1983 BOOM AND BUST 31 is the traditional one-which in cludes socialist and Marxist varia tions-and the second is the Aus trian Malinvestment Theory. There is also a third explanation, one that deals with the so-called "instability" of capitalism, that will also be ex amined. American history textbooks are rife with explanations of 19th-Cen tury recessions that center on "overexpansion" of the railroads or troubles on the farm. The idea, of course, is that a recession begins within a certain sector of the econ 0my and snowballs into other areas, pulling them down as well.

In the industrial society, because of the unusual acceleration which takes place in durable goods, the results of individ ual freedom are more complicated and far reaching (italics mine). Assume that each year twenty million men's coats are sold, produced by 210,000 machines, each of which can make only 100 coats a year ... with a ten percent increase in the sale of coats, there is a one hundred percent in crease that year in the machines needed ... When the demand for a product drops, however, the snowballing effect begins ... he lays off his workers, whose own buying power is now greatly reduced, thus affecting other businesses . .. and the downward cycle is accelerated. 3 While the above explanation of the business cycle may seem viable to publishers of history books, it, in reality, is wracked by fallacies, the first being the informal fallacy of converse accident or hasty general ization. The author assumes that because one particular industry goes bust, all the other industries will topple as well, a sort of business domino theory. However, the demise of one industry may only be signal ing the rise of another. For example, to use the coats again, should there be a lessening of demand for a cer tain brand of coats, the change in consumer taste may be only because another brand of coats is less expen sive or more attractive. Or, perhaps, the entire coat industry in an area has lost its market because the sur rounding temperatures have per manently risen 30 degrees, which might mean a subsequent boom in the sun dress and bathing suit in dustries.

The Fallacy of Composition Whatever the reason for the de mise of one industry, there is noth ing in economics that suggests that the general economy will collapse because one sector loses its appeal to consumers. As economist Law rence Reed has pointed out, to hold that what might be true for one in dividual is also true for all others is to commit the fallacy of composi tion. 4 For example, lobbyists in the home building industry recently persuaded Congress to approve a $3 billion housing bailout bill to prop up that recession-torn sector for an other year (fortunately, President 32 THE FREEMAN January Reagan vetoed the bill). Construc tion lobbyists and their supporters argued that the general economy was sick because the housing market was slow, and, therefore, a general re covery could only be precipitated by giving an artificial boost, via infla tion' to housing. Again, we were presented with the fallacies of con verse accident and composition, this time in reverse.

The traditional explanations to the business cycle are more endemic in economic circles, with socialist and Marxist theories, it seems, being drawn from this area of thought. These arguments center around the idea that downturns in the business cycle result from a shortage of money. In precapitalist times, as Henry Hazlitt writes, "Whenever business was bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money' and by general overproduction."5 This argument has since been re fined by socialist and liberal critics of the marketplace, and, indeed, has become the standard fare when ex planations for the business cycle are sought. In examining this argu ment, it is necessary to study not only the ideas of theorists in precapital ist times (and the disastrous results of their "solutions"), but also the so cialist and Marxist notions and why they are fallacious.

Economic historians are all too aware of the problems of the French economy during the early years of the French Revolution. In 1789, business was slow. Merchants and politicians in the National Assem bly demanded that the government solve the nation's fiscal problems (which were due to a top-heavy gov ernment debt). In seeking a solution that fit with the economic thought of the times, the French Govern ment floated massive amounts ofpa per money to give its citizens "pur chasing power." What resulted from this action, of course, was a wild hy perinflation that destroyed the French economy, helped bring about the famous "Reign of Terror" and ul timately led to the dictatorship of Napoleon. The French leaders in 1789-as well as most government officials since then-assumed the fallacy that money is wealth, a no tion that was exploded by Adam Smith in The Wealth ofNations when he pointed out that wealth comes not from money but rather from the in crease of desirable goods and ser vices.6 The Labor Theory Socialists, beginning with Karl Rodbertus and Karl Marx in the mid Nineteenth Century, have built many of their anticapitalist argu ments upon the fallacy of money being wealth. For example, in his famous Overproduction and Crisis, Rodbertus declared that production was solely for profit and that all pro1983 BOOM AND BUST 33 duction was simply a result of the efforts of labor or the workers.

This standard socialist doctrine, when joined with his beliefs on diminishing wage share, 7 led him to a theory of crises. All wealth being a product of labor, the laborer with his declining wage share was unable to buy' back the products he produced. Markets would be flooded with goods which would bring falling prices and unemployment and, finally, precipi tate an economic crisis. To relieve the situation, Rodbertus proposed that the state take over.8 This general crisis that Rodbertus predicted was the same sort of crisis Marx predicted for the advanced capitalistic West; he emphatically believed that, as production of goods and services increased, the profits of the "capitalists" would increase, wages would fall and the laborer would be unable to purchase those products that he had created with his own labor. Such would be the crisis that would ultimately lead to the workers revolting against their "masters" and leading the western world to communism.

The influence of Rodbertus and Marx is still felt strongly today, es· pecially when leading writers and intellectuals explain their pet causes for the Great Depression. Declares Michael Harrington, who heads the Democratic Socialist Organizing Committee: The Great Depression discredited .Say's Law (which, in short, declares that supply creates its own demand). During much of the 1930s, there was a glut of con sumer goods because workers lacked the purchasing power [i.e.,money] to buy back what they produced. That was why government began to play a role in the economy on behalf of middle-and-Iow in come people during the period of Frank lin Delano Roosevelt's New Dea1.9 Says Time magazine: Economists debate to this day about what caused the Great Depression. A prevailing view, persuasively argued by John Kenneth Galbraith, is that the technological increases in productivity throughout the 1920s (up 43% per fac tory manhour) were not matched by in creases in wages and thus in the public's capacity to consume (factory pay rose less than 20%). The collapse of the overin flated stock market therefore started a downward spiral in both demand and ability to pay. Conservative economists like Milton Friedman, on the other hand, blame the Federal Reserve System for failing to expand the money supply suf ficiently in the wake of the stock market crash. 10 Friedman Ys. Galbraith Although Milton Friedman and John Kenneth Galbraith lead f;lchools of economic opinion that vastly dif fer with each other, one cannot help but note at least some similarity be tween the two men's reasons for the coming of the Great Depression.

Galbraith believes-as do most modern historians and intellec tuals-that Ricardo and especially 34 THE FREEMAN January Rodbertus were correct: production growth outstripped wages, which meant the laborers' wealth dimin ished while the capitalists' or own ers' profits increased. Or, to put it in more familiar terms, the rich got richer and the poor got poorer. To rephrase Harrington, the workers were drained of purchasing power, which was siphoned off by their bosses. While Friedman certainly is no advocate of the above theories, his explanation of the Great Depression ultimately implies that the Federal Reserve System did not inflate enough (Le., put "purchasing power" into the economy) from 1929 to 1933. So, viewing the causes of the Great Depression from the angle of the major schools of economic history, it can be said that the economic down turn happened because the printing presses of the federal government did not turn fast enough to enable peo ple to hold enough "money" in their hands to "buy back" enough of the products that they had created.

Of course, Galbraith and Harring ton-unlike Friedman-have ar gued that in addition to inflating, it is the duty of government also to heavily tax those in upper income brackets and give the revenues to those in lower brackets to insure that people "on the bottom" would have enough "purchasing power" to con sume, thus avoiding "a glut of con sumer goods." Implied in the traditional and so cialist interpretations of the busi ness cycle, of course, are the notions of overproduction and undercon sumption, fallacies that have re mained with us to the present time. l1 But whatever the line of interpreta tion, be it lack of "purchasing power," overproduction or underconsump tion, the theories still abound with fallacies and false assumptions of the economic system. "Money Is WeaJth" The first fallacy, as I have already stated, is that money is wealth. When Galbraith and Harrington dolefully observe the rate of production out stripping the growth of money wages, they have immediately jumped to the conclusion that buying power has diminished. Nothing cQuld be far ther from the truth. Such a view suggests that wealth causes pov erty, or, in other words, a society be comes poorer as it produces more wealth.

The vast increase in production in the 1920s-and, indeed, through most of the industrial age in our na tion's history-served to bring down prices as goods and services became more abundant and thereby more accessible to the masses. For exam ple, the automobile, once a play thing available only to wealthy Americans, became a staple in households with the advent of mass production. In the past decade, we 1983 BOOM AND BUST 35 have seen electronic marvels such as the pocket calculator evolve from extremely expensive but inefficient solvers of mathematics problems to the $10 models that are far superior to their predecessors (and this im provement in quality and decrease in price has come in the face of the galloping inflation of the past 10 years). The socialist viewpoint fails to recognize that wealth is a variable of production of goods and services, not of production of money. Any government on the earth can quickly crank out a vast increase in the sup ply of its designated means of ex change (provided that means is pa per money or base-metal coins, not valuable commodities) and many governments, including our own, have done just that. But the sad les son is, though few politicians and intellectuals have realized it, that inflation does not bring increased wealth, but rather chaos and, in the end, more poverty.

Burdening the Poor Another important criticism of the socialist notion that the increase in production "makes the rich richer and the poor poorer" is that history has shown this view to be utterly false. Even one historian whose text is laced with anti-free market rhet oric concedes that standards of liv ing for ordinary workers rose during the 19th Century, the time when Rodbertus was claiming that the op posite was true. 12 In order for the socialist argument to be true, the lot of the average per son today would have to be far worse than the lot of the average worker before the Industrial Revolution when most people spent about 90 per cent of their income on food. Even the claims of Galbraith and Har rington of the deterioration of pur chasing power during the 1920s are based on the false assumption that the lot of the average person wors ened during that decade. Yet, as historians admit, the lot of the common worker rose dramati cally during the 1920s. When Presi dent Herbert Hoover in his innau guration speech of 1929 trumpeted to the world that the "eradication of poverty" in the United States was in sight, few persons saw fit to disagree with him. In fact, the other pre-1929 depressions in the United States usually followed periods of increases in the standard of living for most people. There is simply no historical evidence that shows that Americans have become gradually poorer since the beginning of the Industrial Rev olution. The socialist claim that cap italism enriches the few at the ex pense of the many simply has no logical base.

There is, however, some truth to the idea of overproduction and UD derconsumption in times of reces sion. After all, many businesses in 36 THE FREEMAN January the late 1920s did expand greatly, only to find no markets for their goods. There was an abundance of farm products in the early years of the Great Depression that, for some reason, could not be sold. As one po litical cartoonist noted in a sketch, there was "too much oil, too much wheat and too much poverty." It does no good, however, to only state the conditions. One must in vestigate the causes of such a calam ity. There was a reason why wheat in America's heartland was in abun dance but families went hungry. There was a reason that factory in ventories were choked with goods that no one seemed able to buy. To simply claim that farmers grew too much wheat or factories produced too many widgets and those actions brought about the Great Depression or any other depression is to commit the fallacy of false cause. Most eco nomic historians, however, have done just that. They have seen the results of the problem and have concluded the results were in reality the cause.

Periods of Boom and Bust Preceded by Inflation If we are to solve the riddle of the business cycle, it is necessary to first look for common characteristics of the periods of boom and bust. And, as pointed out earlier in this paper, inflation seems to have been present in most of the boom periods. For ex ample, in the years after Andrew Jackson killed the Bank of the United States and before he issued his famous Specie Circular in 1836, irresponsible state-chartered banks created vast amounts ofpaper money, much of which went to speculation on public lands, finding its way ul timately into the Federal treasury. As the supply of partially-backed money increased, Jackson became alarmed and ordered that public lands be paid for in silver and gold rather than paper. As noteholders rushed to convert their paper into specie, many banks, unable to meet any sort ofreserve requirement, went under. In 1837, a panic began which brought hardships to many Ameri cans and guaranteed President Martin Van Buren only one term of office.

In the violent but short-lived Panic of 1893, one finds the roots in the Sherman Silver Purchase Act of 1890 which required the U.S. Treasury to purchase overvalued silver with gold certificates, thus creating a run on the treasury's gold reserves. The re sulting monetary crisis forced Pres ident Grover Cleveland to call a spe cial session of Congress in 1893 to repeal the Sherman Act, thus halt ing the silver inflation. A deep recession began that year, an event that led to Coxey's Army (which wanted the federal government to print money to pay for public works programs, a plan Cleveland wisely refused) and the 1896 free-silver 1983 BOOM AND BUST 37 Presidential candidate William Jen nings Bryan. During depression periods, busi nesses held goods they could not sell, farmers had crops, that despite low prices, no one could seem to afford. ?eople lost their jobs; wage earners could not support their families; businesses could not expand despite the availability of cheap materials and cheap labor.

At this point one might ask: Was there any correlation between the monetary problems in the boom-bust periods and the business down turns? Were these phenomena re lated or was taeir simultaneous ap pearance just coincidence? There are other questions to be answered as well. The overexpan sion of one business or even a few businesses· has an easy explanation: investors and entrepreneurs do mis interpret the market at times. For example, when the World's Fair re cently was held in nearby Knox ville, many entrepreneurs invested in campsites, mobile homes and quickly-built motels, hoping to cash in on the expected horde of tourists. However, the flow of fair visitors, though heavy, did not fall into the preconceived patterns of some investors, which means, in the ver nacular, they took a bath. There were other investors, however, who accu rately read the coming markets and, indeed, did strike their fortunes.

But to take the specific, that is, the probability that some investors will misread the market, and place it in the general, or that most inves tors will misread the market at the same time-under normal business conditions-is to commit fallacies of converse accident and composition. What is true for one person may not be true for everyone; to assume oth erwise is fallacious, but that is pre cisely what most economic histori ans have done. Why the Cluster of Errors? Yet, as one can tell by the unsold bumper crops, the glut of goods and the dashed plans of expansion that have characterized the downside of the business cycle, those who look upon overproduction or undercon sumption as the prime causes seem to be right. But, we must ask,why the· cluster of errors? Why did so many investors and producers com mit the same general errors at the same time, especially during the late 1920s? Few economists have sought to answer that question. Liberal his torians blame the disastrous stock market speculation and subsequent crash on the Coolidge-Mellon tax cuts, which slashed the top rates from 63 per cent to 24 per cent, claiming that the rich had too much money with which to speculate (which im plies, of course, that government of ficials spend other peoples' money more wisely than the people spend their own funds).

38 THE FREEMAN January But tax cuts or low tax rates had never been responsible for faulty speculation or malinvestment be fore 1929, which makes it difficult to believe that investors, from the very wealthy to lower-class savers, had suddenly in concert thrown much of their hard-earned money into a bottomless pit. All of which leads back to the original question: Why the cluster of errors? The answer can be given in one word: inflation. But to understand why inflation has been responsible for misleading large numbers of investors and producers at the same time, one must first comprehend the role of saving and spending in the economy. Concerning the Role of SaVing and Investment As classical economists since Adam Smith have pointed out, the creation of wealth originates with capital, which is a product of entrepreneu rial perception and action financed by savings. The basis for the produc tive economy-despite what politi cians, journalists and liberal econo mists tell us-is not spending but rather saving. Consumer spending acting in concert with a free, un hampered price system serves as a guide or a rudder to the economic process. Consumers, by voting with their dollars, decide which investors are to be winners and which will lose.

Spending does not create wealth; it only decides what, in the final anal ysis, will be considered to be wealth and what will not. It seems logical, then, that the greater a community's or nation's pool of savings, the more opportuni ties to create wealth exist. But what happens when government, by in jecting credit into the market via the purchase of government debt and a blip on a computer, expands the available pool of money beyond what has been saved by individuals? Free market economist Hans F. Sennholz clearly spells out the results: The creation of credit by monetary au thorities causes interest rates in the loan market to fall below the natural rate of interest. This natural rate, or unham pered market rate, reflects the people's choices as to spending and saving, and is responsible for the relative proportions , of production for the present and the fu ture, that is, consumers' goods and pro ducers' goods. A rising rate of saving, for instance, causes producers' goods indus tries to expand as more economic re sources become available for expansion and modernization. If, without such new savings, monetary authorities arbi trarily expand credit, interest rates tend to fall, which then misleads business men to invest more funds in the capital goods industries (italics mine). Thus misled by artificially lower interest rates, they em bark upon countless expansion projects that are unsupported by genuine sav ings. They engage in business activity that causes maladjustments and distor tions. 13 1983 BOOM AND BUST 39 In other words, inflation misleads investors who mistake fiat rates of interest as being real or genuine rates. However, as numerous adher ents to the "New Economics" have held, why can't the Federal mone tary authorities continue their cre ation of new credit indefinitely, thus giving the economy a permanent boost?

The answer lies in the nature of inflation itself. Inflation is, as aptly said by Friedrich von Hayek, a "ti ger by the tail." Continued doses of inflation to stimulate an economy soon take on a life of their own. As the amounts of fiat money are in jected into the economic main stream, prices rise-despite efforts of government officials to control them with price controls-profit margins diminish, lending authori ties are forced to raise real levels of interest, thus forcing a slowdown of business activity, and the market processes continually become· more and more distorted. And, as the in flation continues to drive prices be yond the reach of more and more cit izens, a public outcry grows from a frightened people who demand an immediate end to the calamity. The Rate of SaVing Declines During the inflationary' period, another sinister development be sides rising prices and business slowdowns occurs: the diminishing of savings rates. While inflation rages, the continuing debasing of the currency causes savings to lose their value, thus changing the engine of the economy from savings and in vestment to accumulation of debt.

And once authorities stop the infla tion, the reversal of debt-accumula tion trends brings severe contrac tions to the economy. Without an adequate savings pool to keep inter est rates at former low levels, debt ors who prospered during inflation now face financial hardships. As for the producers' goods indus tries that expanded during the infla tion, Sennholz writes: The credit expansion misleads busi nessmen into costly errors of expansion and modernization for which there is no consumer demand. The fiscal deficits that are to stimulate economic recovery and full employment bolster some industries while depressing others. 14 The end result, which occurs no matter if governments halt the in flation or not, is recession and un employment. Victims of inflation may have more money in their hands, but their real purchasing power, because the troubled econ omy is producing less, has shrunk.

That phenomenon is clearly seen at this present time with many Euro pean nations, including Ireland and England, along with our neighbor Canada, suffering from both high inflation and high unemployment. The United States, on the other hand, having brought its recent double40 THE FREEMAN January digit inflation rates to near five per cent, now is paying for its previous fiscal foolishness with unemploy ment. A Depressed Housing Industry A clear example of the course of inflation can be seen in our nation's housing construction industry. In the 1970s, while the federal government subsidized the industry with below market interest rates, housing boomed, along with the related in dustries such as carpet-making, lumber and large home appliances. However, once inflation had finally driven the low rates far beyond the reach of the average buyer, along with pushing construction costs to record levels, the industry, along with companion producers, slipped into depression. And without a large savings pool to help finance new construction (government spending presently takes nearly 80 per cent of savings), the outlook for the housing industry, at least in the near future, is bleak.

As mentioned earlier, however, home building lobbyists have con vinced the Congress to push through an ill-advised inflationary bailout bill. But such action-which could only aggravate inflation-is to seek a cure by taking in another dose of the disease. But, with business bankruptcies increasing and unemployment rates reaching near 10 per cent, what should government do to alleviate the problem? The answer, which may seem heartless to liberal historians, economists and intellectuals (not to mention the millions of persons out of work) is to do nothing that would add to the burden of government. As we have shown, government is the cause of boom and bust, the infla tionary boom coming first when the original doses of credit spur ill-ad vised economic expansion, and the bust coming when the forces of sup ply and demand take their natural course. Politicians cannot repeal the law of supply and demand. There fore, it is best for government offi cials to admit their inflationary mis takes and then step back as the economy goes through the painful but-usually -brief period of readjust ing itself in line with market prices and wages and real consumer de mand.

In fact, before the Great Depres sion, the policy of the federal gov ernment' once its ill-advised actions had led to boom and bust, was lais sez-faire. The depressions, though often turbulent, were mercifully brief. However, when the stock market crashed in the fall of 1929, following nearly a decade of an inflationary boom engineered by the Federal Re serve System, the federal govern ment, first under the leadership of Herbert Hoover and then Franklin Delano Roosevelt, intervened at al1983 BOOM AND BUST 41 WHEN there is relative stagnation in business, and unemployment, it is usually because an unbalanced and unworkable relationship has devel oped between prices at which goods can be sold and their costs of production. The main difficulty, usually, is that wage-rates are too high in relation to prices. This could be cured by a readjustment of specific wage rates, by more flexible wages and prices, by permitting competition to work. The first effect of a new injection of bank credit or paper money into the system is, indeed, an apparent increase of that "purchasing power"

which is so much wanted. It enables "surplus" goods to be sold at their existing prices. It enables prices of other goods to be raised to levels at which existing wage-rates can be paid and a full complement of workers hired. So it tends to restore that "full employment" so cherished, at any cost, by the modern reformer. This goal is achieved under inflation by raising prices enough to validate the existing level of wages. But what is forgotten is that the adjustment could have been made not only just as well, but much better, by a realignment of the particular wages that had got out of line. -from Henry Hazlitt's Introduction to Andrew D. White's Fiat Money Inflation in France most every level. The Hoover ad-more soundness. During the FDR ministration, for example, doubled years, the federal government as the income tax rate, pushed tariff saulted property rights, inflated, rates to ruinous levels, attempted to stymied agricultural production, cartel both industries and the agri-raised taxes and took ever-increas cultural sector and sought to keep ing bites from the nation's produc both prices and wages far above tion of wealth. By acting in concert market levels. Anyone of those ac-with labor union leaders in attempt tions following the stock market ing to unionize much of the U.S. la crash would have seriously im-bor force, the government helped paired a business recovery; togetl1er "drive wage rates above market lev they acted in concert to bring the els, thus touching off the ruinous economy to its knees, and, in the depression of 1937-38. It is clear that process, throw nearly a quarter of the ''humanitarian'' attempts by both the American work force offthe job.15 the Hoover and Roosevelt adminisNor can it be said that the Roose-trations to slow the forces of supply velt Administration acted with any and demand as the nation lurched 42 THE FREEMAN into depression in the long run only served to increase the human suffer ing so starkly depicted in the grim, austere photographs that record the anxious years of the 1930s.

The governments of the so-called capitalist West have learned little since the disasters of the 1920s, '30s and '40s. Politicians still see infla tion as the best weapon to fight un employment even while the record shows their actions to be foolish. The business cycle is still seen by many as the natural result of "unbridled" laissez-faire. But there is much we can learn by examining the business cycles. By carefully studying historical eco nomic developments, we can easily see that inflation is not the cure but rather the culprit. Inflation may, in its early days, give people an illu sion of wealth; when it has run its course, however, it has borne not riches but rather poverty. How does a nation avoid the roller coaster of the business cycle? The words of Ludwig von Mises seem to be wise counsel: If the policies of nonintervention pre vailed-free trade, freely fluctuating wage rates, no form of social insurance, etc. there would be no acute unemployment.

Private charity would suffice to prevent the absolute destitution of the very re stricted hard core of unemployables. 16 ® -FOOTNOTESIGene Tharpe, "Fitting Economics to Eco nomic Reality," The Atlanta Constitution (March 18, 1982), 5-A. 2Robert Lekachman, "Reverse Most of Rea gan's Policies," U.S. News & WorldReport (April 5, 1982), p. 38. 3Marvin Miller, The American Dream: Shadow and Substance (Covina, California, 1976), pp. 278-279. 4Lawrence W. Reed, "Seven Fallacies of Eco nomics," Freeman (April, 1981), p. 212. 5Henry Hazlitt, The Failure of the "New Eco nomics" (Princeton, New Jersey, 1959), p. 33. 6Reed, pp. 212-213.· 7Rodbertus accepted Ricardo's "Iron Law of Wages" that claimed that laborers would al ways make no more than subsistence wages be cause any real increase in pay would only serve to make the laborers' families larger. Ricardo's so-called "Iron Law" has historically been shown to be made of paper.

8John Fred Bell, A History of Economic Thought (New York, 1953), p. 373. 9Michael Harrington, '~nd the Poor Get Poorer," Today's Education (September-Octo ber, 1981), p. 31. lOTime,February 1,1982, p. 22. llFor an excellent critique oflong-held causes of the business cycle, read America's Great Depression by Murray N. Rothbard. 12JohnA. Garraty, The American Nation (New York, 1971), p. 608. 13Hans F. Sennholz, Age of Inflation (Bel mont, Massachusetts, 1979), p. 130. 14Ibid.,p. 131. 15Rothbard spells out in detail the effects of Hoover's interventionism in America's Great Depression. 16Paraphrased from the William E. Rappard contribution "On Reading von Mises," in Mary Sennholz, ed., On Freedom and Free Enterprise (Princeton, N.J.: Van Nostrand, 1956), pp. 18 19.