Michael Bliss is the most sensible Canadian historian living today. But as his op-ed piece today in the Globe and Mail demonstrates , he is also a sensible economic thinker.
Sounding eerily Austrian, Prof. Bliss suggests that our current economic travails proves that the consensus reading of the Great Depression is wrong. According to that interpretation, the economy would not have collapsed in the 1930′s if governments had then actively intervened with expansionary monetary and fiscal policies. We now know better, so this argument goes, and recognize that a downturn must be fought by aggressively lowering interest rates and dauntlessly running deficits.
Of course, this is precisely the monetarist and Keynesian medicine that the Bernanke-led Fed and the Obama Administration has served up. Yet the economy remains moribund with the threat of a douple-dip recession hovering over us.
Prof. Bliss is especially insightful in explaining why the interventionist approach hasn’t worked:Â (1) markets have not been allowed to clear and correct the mistakes that were made during the boom period; (2) because not everyone agrees that printing and spending money are wise moves, business and investor confidence has not revived.
This last point is especially on the mark, as the Keynesian model assumes a Pavlovian psychology in which individuals automatically respond to fiscal and monetary stimulus by merrily buying and investing more. The human mind works in far more complex ways than that.
The upshot, Bliss argues, is that we need to revisit pre-Depression understandings of the business cycle:
Before the age of Friedman, Bernanke and apologists for the American New Deal, there had been a view of the Great Depression as a global economic correction caused by vast imbalances of supply and demand on world markets that had their origins in the dislocations caused by the Great War of 1914-18, and excessive lending in the 1920s. On this view, held by Herbert Hoover and some of his supporters, not a lot could be done to ease the crisis until markets cleared or righted themselves. The patient would recover when nature took its course.
One can definitely contest Bliss’s assertion that Hoover was an anti-interventionist — indeed, the historical evidence indicates that he laid the groundwork for Roosevelt’s New Deal.Â The excessive lending of the 1920′s, too,Â is arguably more important in explaining the Depression than the dislocations caused by World War I.
These qualifications made, however, Bliss is basically pointing to the Austrian view.