Its wasn't a failure of capitalism that led to the financial crisis, but the "monetary socialism" of central bank planning...
THERE'S A STORY about a Soviet official who travelled to London during the Cold War. As he was shown around he couldn't believe how full the shops were of all sorts of produce. Amazed by this bounty, he eagerly seized his guide and asked "Who is in charge of the bread supply to London?" The baffled reply came – "No one".
I was reminded of this story and how, from the Austrian viewpoint, economics is about coordination, at an excellent talk I heard in east London last Thursday night by British member of parliament Steven Baker, writes John Phelan for the Cobden Centre.
He made the point that this was one of the issues we fought the Cold War over. Unlike the communist east, the capitalist west believed that economies were better organized by the millions of individual decisions taken in a free market on a second-by-second basis than they were by planners ensconced in offices pouring over reports.
The outcome was that Austrian economists Mises, Hayek and others were proved right. Communism collapsed and socialism was rejected. Free markets were reaffirmed under Margaret Thatcher and Ronald Reagan and the planners were pensioned off.
Except, that is, in one vitally important area. In the Monetary Policy Committee of the Bank of England, the Federal Reserve, and the Executive Board of the European Central Bank, the planners still cling on, fixing the price of money: the interest rate.
It is crucial for people to understand that what central banks with boards of price setters represent is not a free market but what Baker called "monetary socialism". And the central planners have proved no better at setting the price of money then they ever were at setting any other price.
It was the driving down of interest rates by these planners which flooded the financial system with liquidity after the twin shocks of the bursting of the internet bubble and 9/11. It was this liquidity, hosed about by the planners, upon which the housing market floated to ever giddier heights. And it was when the planners acted to raise interest rates to counter the inevitable inflation they had caused that the bubble burst. It was not capitalism but monetary socialism which failed.
Economists of the Austrian School are highly sceptical of the possibility that this central planning of money will produce optimum results. They are cognisant of the long and dismal history of such central planning in other spheres, and their theories have been borne out by recent experience. The Austrians were right about socialism not working. And they have been right about monetary socialism not working.
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