The Nobel award to F.A. Hayek in 1974 went directly against the tradition of that prize to go only to mathematical forecasters, left-liberals, and government central planners. Not only was Hayek’s work pioneering, but it is also the only correct analysis of business cycles past, present and future since they began in the mid-18th century.
Initially, various economists concluded that the boom-bust cycle must be deeply rooted within the free market industrial capitalist system. The blame must rest with free market capitalism, said Marx and Keynes. Government spending was to make up for some depression in the private sector. Too little spending created unemployment. Too much spending created inflation. However, this Keynesian concept has failed.
Another group said that it is the government-controlled fractional reserve banking system that is the cause. As far as this goes, it is accurate.
The problem was that when an inflationary credit expansion was pumped into the system, it not only tended to raise prices, it did something worse. It distorted the production system. It caused over-investment in construction and capital goods and under-investment in consumer goods. The recession becomes necessary medicine to the real evil – the boom.
In the normal course of events, prices don’t remain constant, they fall. The Austrian theory was the only one that predicted and could explain the Great Depression. But the fashion changed. Austrians were dropped. Keynesians thrived. Keynesians wanted government spending and deficit spending. In the 1920s there was no theory going on. There were simply institutions.
The only explanation Rothbard has for the number of Misesians who shifted over to Keynes was sellout. Looking at the money factor or the economic factor explains the shift. Keynesianism is filled with fallacies. Government has to use statistics to plan. Strip government of statistics, they can’t do anything.
Fischer and Mitchell viewed themselves as intellectuals who were above class struggles and divinely appointed to plan everything for society. It was a naked grab for power. The Invisible Hand of Planning is about these social scientists. So, Keynesianism is still around, but they have nothing to say.
The final lecture in a series of six on the History of Economic Thought.