Von Mises: The Man who predicted the Great Depression

Finally, the Albert Einstein of economics gets some recognition in the mainstream financial press. Being an Austrian by birth, Ludwig von Mises’ pioneering work in economics in the late 19th and early 20th century gave rise to what is today known as the ‘Austrian school.’ Of course his theory on economics was built on other great scholars’ work, but von Mises really came up with a ’unified field theory’ for the social sciences, and in particular for economics in his treatise on the subject, Human Action. 

This ‘Austrian’ view fell out of favour with the mainstream after Keynes’ General Theory was published in 1936, because the latter advocated government intervention to correct inevitable ‘failures’ of the free market. The stage was set for government to ride in on its horse to save the economy by spending money it does not own, by running fresh dollar bills off the central bank’s printing press when the need arises. Von Mises showed that government intervention caused the market to fail in the first place. As he explained, the process of credit and money creation out of thin air, unbacked by commodity money, is what causes the business cycle. In the case of the Great Depression, credit created out of thin air in the 1920s created the boom, setting the stage for the inevitable bust which played out from 1929 to somewhere before WWII. The government interference to then ’save’ the economy just prolongs the necessary adjustments from taking place, and pushes out the real economic recovery. This is again happening today.

From the Wall Street Journal on Friday, a great article by Mark Spitznagel:

The Man Who Predicted the Depression

Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy.

Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (”The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Read the rest here.

The Austrian school of economic thought has not gone away and is still, without a doubt, the only way to understand the current fragile state of the global economy. See the posterboy of the Austrian school, Peter Schiff, in this clip and you decide for yourself whether firstly, new economic theories need to be thought up (so fondly thrown out there by public sector economists and other followers of Keynes like Paul Krugman in this article), and secondly, whether the Keynesian theory, as argued by everyone in this clip against Schiff actually realise that their economic knowledge is absolutely worthless.