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Jul 31, 2012

Counsel of Despair?

Over the years, I have heard many people say that the government’s adoption of a laissez-faire stance during a business recession or depression amounts to “do-nothing government”—the unstated assumption always being that it is better for the government to “do something” than to do nothing. Recommending such a hands-off stance is often described as a “counsel of despair.” Moreover, it is frequently added, in a democratic polity, the electorate will not tolerate such a policy.

Implicit in such criticism is the assumption that the government knows how to improve the situation and has an incentive to do so. If only it will take the known remedial action, people’s suffering will be relieved, and the economy will return more quickly to full employment and rapid economic growth. All that blocks such remedial action, it would seem, are outdated ideas about the proper role of government and, perhaps, the opposition of certain selfish special interests. Government need only step on the gas pedal, by means of expansionary fiscal and monetary policies, and the economic engine will accelerate. If the government is already taking such actions, it need only press down harder on the gas pedal.

Adherents of the Austrian school of economics are sometimes singled out as moss-backed exponents of the “liquidationist” position said to have been taken by Treasury Secretary Andrew Mellon after the onset of the Great Depression in the United States. According to Herbert Hoover, Mellon urged him to refrain from involving the government in the situation, in order to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…. [I]t will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Although not so colorful in their policy advice, Austrian economists do recommend that the government stand aside when a business bust occurs. (They also explain how government action, especially its monetary policy, has brought about the preceding, unsustainable boom.) By so doing, the policy-induced structural distortions whose unsustainability brought on the bust in the first place will be corrected. Resources will be reallocated away from enterprises that are losing money and capital value because consumers are unwilling to support their profitable operation, and they will be put to work in other lines, where prospects of successfully satisfying present and future consumer preferences are brighter. Business bankruptcies, unemployed labor and capital, and other dire developments only attest that mistakes have been made. In order to restore sustainable prosperity, these mistakes must be corrected, not papered over.

If the government props up unprofitable firms with bailouts and cheap loans and subsidizes unemployed workers with extended unemployment-insurance benefits and other income supports, it only obstructs and delays the necessary restructuring of the economy’s resource allocation. Although it may appear to be relieving people’s pain—and, indeed, it is doing so for those fortunate enough to receive booty at the public’s expense—it is only ensuring that by falsifying the price and profit signals that tell economic actors how to act most rationally in the society’s long-term benefit, it is preserving an economically irrational allocation of resources and thereby planting a time bomb that will explode later in the form of an even worse bust.

Thus, what seems to be governmental “compassion” is scarcely true compassion, but only a spurious assistance to some at the present expense of others and, ultimately, to the detriment of almost everyone. The true counselors of despair are those who insist that the government act even though the government cannot act constructively and its actions will, at best, only produce short-term improvement in the patient’s symptoms while ensuring that in the long term, he will fall victim to an even more painful malady. If the patent is bleeding, it is scarcely compassionate to attach government leeches so that he loses blood even more rapidly. The true counselors of despair are those who hope against hope—and historical experience—that the government can and will act constructively. Such wishful thinking cries out for deeper study of Austrian economics and economic history, not to mention a more thorough understanding of the sort of people who run governments and of their reasons for exercising government power.

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