Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory

Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory
Profile photo of Robert P. Murphy

In the summer I wrote a post for Mises CA explaining that Jared Bernstein had unwittingly confirmed that the Austrian financialmartin wolf commentators weren’t paranoid for warning people that the USD’s days as the world’s reserve currency were numbered. Today I have a similar post, in which I’ll just quote from a Martin Wolf article in the FT (from last month) that sounds as if it had been written by Friedrich Hayek. Here’s Martin Wolf:

Huge expansions in credit followed by crises and attempts to manage the aftermath have become a feature of the world economy. Today the US and UK may be escaping from the crises that hit seven years ago. But the eurozone is mired in post-crisis stagnation and China is struggling with the debt it built up in its attempt to offset the loss of export earnings after the crisis hit in 2008.

Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply. It looks like a law of the conservation of credit booms….

Incredibly, the eurozone seems to be waiting for the Godot of global demand to float it off into growth and so debt sustainability. That might work for the small countries. It is not going to work for all of them…

These credit booms did not come out of nowhere. They are the outcome of the policies adopted to sustain demand as previous bubbles collapsed, usually elsewhere in the world economy. That is what has happened to China. We need to escape from this grim and apparently relentless cycle. But for now, we have made a Faustian bargain with private sector-driven credit booms. A great deal more trouble surely lies ahead.


Now to be sure, Wolf is still a Keynesian in his prescriptions: he wants more monetary and fiscal stimulus. But my point with this post is to show that his diagnosis is thoroughly Austrian. Guys like Larry Summers and (yikes!) Paul Krugman, with their “secular stagnation” hypothesis, are also coming around to the view that Western economies have been bouncing from bubble to bubble, fueled by central bank policies.

At this point, more and more economists and analysts agree on the causes of our problems. Now we’re just disagreeing on the solutions. This is actually progress.

  • @UnshacklePak

    Is it because Austrians have been saying the same things over and over for decades that the message is beginning to penetrate? Or is it because the occurrence of bubbles is so frequent now that those relying on empirical data have no choice but to end up noticing something?

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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