Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s—a time, just like today, when economists and politicians, armed with a “new economics” of perpetual inflation, and with new “tools” provided by the Federal Reserve System, proclaimed a perpetual “New Era” of permanent prosperity guaranteed by our wise economic doctors in Washington.
Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect. F. A. Hayek spread the word in England, and the younger English economists were all, in the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the depression—and also to adopt, of course, the strictly free-market policy prescription that flowed with this theory.
Unfortunately, economists have now adopted the historical notion of Lord Keynes: That no “classical economists” had a theory of the business cycle until Keynes came along in 1936. There was a theory of the depression; it was the classical economic tradition; its prescription was strict hard money and laissez-faire; and it was rapidly being adopted, in England and even in the United States, as the accepted theory of the business cycle. (A particular irony is that the major “Austrian” proponent in the United States in the early and mid-1930s was none other than Professor Alvin Hansen, very
to make his mark as the outstanding Keynesian disciple in this country.)
What swamped the growing acceptance of Misesian cycle theory was simply the “Keynesian Revolution”—the amazing sweep that Keynesian theory made of the economic world shortly after the publication of the General Theory in 1936.
It is not that Misesian theory was refuted successfully; it was just forgotten in the rush to climb on the suddenly fashionable Keynesian bandwagon. Some of the leading adherents of the Mises theory—who clearly knew better—succumbed to the newly established winds of doctrine, and won leading American university posts as a consequence.
But now the once arch-Keynesian London Economist has recently pro-claimed that “Keynes is Dead.”
After over a decade of facing trenchant theoretical critiques and refutation by stubborn economic facts, the Keynesians are now in general and massive retreat.
Once again, the money supply and bank credit are being grudgingly acknowledged to play a leading role in the cycle. The time is ripe—for a rediscovery, a renaissance, of the Mises theory of the business cycle.
It can come none too
; if it ever does, the whole concept of a Council of Economic Advisors would be swept away, and we would see a massive retreat of government from the economic sphere.
But for all this to happen, the world of economics, and the public at large, must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years.
Economic Depressions: Their Cause and Cure / Murray Rothbard .
