One of the marks of great writing is that, no matter how abstract a subject might be, the author’s text remains lucid and understandable. It is not crowded with irrelevant information, unduly antiquated language, or a dense texture. H.L. Mencken, Joseph Ratzinger, and Murray Rothbard all have this gift. So does Tom Woods, whose recent book Meltdown I finished earlier this week.
The grand larceny that the government commits is probably aided in no small part by the abstract and difficult nature of the subject of economics. Add to this factor the reality that most schools of economics, such as Keynes’ and Friedman’s, in addition to being absurdly objectivist, are also about as exciting as the first four and a half hours of Dances with Wolves. The information that does get to the public is usually watered-down lies: the GDP, which only measures the consumption of final products and not of raw materials, and the unemployment numbers, which are, at present writing, grossly underestimated, are but two examples. Little mystery is left as to why there is so much misunderstanding, confusion, and downright indifference in the general public.
Enter into this lamentable situation the work of Tom Woods, whose latest book has descended into the hellish American political debates like dew from heaven. Woods strikes at the root of the philosophical errors which have our economy trapped in a kind of samsara cycle of booms and busts, and he does so in a way that people whose eyes rightfully gloss over during the business reports on TV can understand and appreciate the nature of the problems that the United States now faces. I have read many books on economics, but this one cleared up so many issues for me, including certain details on which I was foggy with respect to fractional reserve banking and the operations of the Federal Reserve. But as understandable as his writing is, Woods does not gloss over anything, drawing carefully-written lines in just the right places. Qui distinguit, bene docet.
In the center of this book, Woods takes on the myths surrounding the Great Depression, Herbert Hoover, and Franklin Roosevelt. The conventional wisdom, of course, is that the Great Depression was worse than it needed to be because Herbert Hoover was a laissez-faire president and did nothing, and that FDR arrived on the scene, fully armed with public works projects and other chimeras which, along with a major war, allegedly saved us from further economic disasters. Woods systematically dismantles this version of history, and in the process of showing that it was precisely the government intervention that made things worse, he brings to light the interventionist policies of the Hoover administration and a journal entry from Treasury Secretary Henry Morgenthau which admitted that none of the government programs were actually working, amongst a whole host of other fascinating information. And yet again, he takes on the false notion that World War II ended the Great Depression. As a matter of fact, the numbers did not improve until 1946, after the soldiers returned home and re-entered the work force. In the midst of all this, Woods glances at something most wouldn’t think to consider: the inexperience of the women and children who replaced the soldiers in their jobs while they were off at war. What impact did their inexperience have on productivity?
Woods’ engagement of the Civic Religion surrounding New Deal politics is the great keystone of his book, for these myths are, for many people, the assumed truth that they bring to any conversation about economic issues, and if there is any progress to be made in re-establishing a market that is actually free, then these prejudices must be confronted. In addition to his theoretical arguments, Woods examines a number of economic downturns in American history, many of which are cited by economists in an attempt to discredit the Austrian Theory of the Business Cycle which Woods promotes. Time and again, the author brings facts to light that only buttress the work of Mises and Hayek, who were pioneering members of the school of thought in which Woods works. Two of the most important examples used are the crashes of 1819 and 1920, the latter of which was worse than the crash of 1929 but which lasted only a year because the government did precisely nothing.
Back to contemporary issues. Woods discusses the government’s role in creating the housing bubble which burst in 2008. First there is Fannie Mae and Freddie Mac, whose careless policies encouraged banks to give out risky loans. (This is made all the easier when everyone knows that the Fed will act as a “lender of last resort” in the event that the risky loans end up in default.) Then there is the Community Reinvestment Act and affirmative action lending, which the government promoted by practically harassing banks to make loans which they knew to be ill-advised. And in addition to discussing the various kinds of wreckless speculation which were taking place, such as “house flipping,” Woods also takes on the dishonest debate between the Republicrats and Democans about how much regulation there should be in the market. The status quo has made this discussion fundamentally pointless, since neither party really supports the idea of a free market, however much one of those parties likes to bandy that term about.
Central to Woods’ thesis is the aforementioned Austrian Theory of the Business Cycle. This system of thought, first developed by Ludwig von Mises, holds that business cycles are not intrinsic to free markets, but that they are rather a result of government tampering with the marketplace through the creation of central banks, manipulation of the currency, playing with interest rates, fractional reserve banking, and the like. In support of the Austrian view, Woods offers up the dot-com bust and the crash in Japan in the 1990’s. He explains how artificially low interest rates encourage mal-investment and send business leaders the wrong signals, encouraging them to embark on projects that are doomed, since an inflationary bubble does treacherous work on the factors of production involved in long term projects.
Woods devotes an entire chapter to money: its origins (neither from government nor greed), its history, and the way it creates wealth by making trade more feasible. He not only covers the hot topic of inflation but also ventures into the more obscure but no less important matter of deflation, the latter being considered by the voodoo economists as a bad thing. This was the mistake that FDR made in the Great Depression, and his subsequent decision to enact price floors was disastrous for the American economy. Woods’ discussion of commodity monies such as gold and silver is followed up by a reckoning with the usual bromides offered by the monetarists who are opposed to a hard money solution. The author’s arguments are thorough, and though he seems not to deal with one issue—the contention that more gold could be mined to create more money and thereby destabilize the money system—he does address it obliquely in that he mentions the fact that gold takes a long time to produce and bring into the market, unlike paper, and especially unlike the electronic computer transactions which the Fed does in modern times.
Professor Woods is not content, however, only to tell us what’s wrong with our present situation, and he develops a final chapter on where we should go from here. At the beginning of this argument he offers the useful distinction, first elucidated by Adam Smith, between productive consumption and non-productive consumption. Woods uses the example of wearing out an air conditioner over a number of years to show what non-productive consumption is: A good is exhausted without creating other materials to provide for its replacement. A machine, on the other hand, is an example of productive consumption: While it will eventually wear out, it will have performed sufficient work to provide more resources for the future. Woods puts it pithily: “Consumptive expenditure uses up, exhausts, and destroys; productive expenditure provides for its own replacement in the form of an increased supply of goods in the future.” The diminishment of capital which takes place in the wake of the recent government stimulus packages is a form of non-productive consumption, Woods argues. It is yet another aspect to the civic superstition that we can spend our way to a prosperous paradise.
From here (and I can only hope that I’ve explained the above distinction adequately) Woods goes on to suggest some concrete moves, including letting the companies who fail go bankrupt. Their assets will be bought up by others, and certainly if they served a useful function in the market someone else will step in and fill the need. Woods advocates the abolishment of Fannie Mae and Freddie Mac, as well as ending the Federal Reserve, which is really the sinister force behind most of our economic problems, not least because this bank is so difficult to understand.
It has been said that knowledge precedes love. To love someone, you must know him first. The same is perhaps true for ideas. Libertarian economists—usually men of the Austrian School—have taken a beating over the years, having been accused of possessing an irrational hatred for the government and its programs. Only one who is unfamiliar with the work of these men, however, would level such a charge, for the fruit of their elucidations is the insight that liberty and mutuality, not theft and coercion, are what create our prosperity. Lying at the heart of the libertarian argument is a deep concern for the welfare of mankind. Understanding the libertarian mindset is, of course, a prerequisite to seeing the truth in this, and I can think of no better way to start in this process than by reading this offering by Tom Woods. Because of this, his greatest service is not that he has debunked the quacks, but that he has shown us the way to liberty and prosperity. Will we have the courage to follow him?