The Surprising Answer for How to Handle The Next Recession

Lawrence White,

Release Date
October 14, 2013


The Fed & Monetary Policy

When economic troubles strike, policymakers are eager to do something to try to help the citizenry. But Prof. Lawrence H. White argues that government doesn’t necessarily know how to relieve economic woes, and in fact, often wastes and mismanages resources. Individuals in the market know better what they need in their circumstances, as economist Friedrich Hayek argued during the Great Depression. Relying on government to fix our economic woes instead of allowing individuals to make decisions for themselves means putting all of our eggs in one basket. Individual decisions in the market won’t  be mistake-free, but each individual mistake will be smaller and will correct more quickly. The unusually slow and painful recovery that we have seen in this recession point to problems with the “government should do something” view. What do you think might be the best way to handle economic difficulties? Why?

Higgs on the Great Depression [podcast]: Russ Roberts sits down with Robert Higgs to discuss how New Deal policies had created uncertainty in the economy rather than help create stability
Nye on the Great Depression, Political Economy, and the Evolution of the State [podcast]: Russ Roberts sits down with John Nye of George Mason University to discuss why support for free market policies is so unpopular during crises
World War II Spending Did Not End the Great Depression [article]: Sheldon Richman from Reason Magazine discusses why aggregate statistics fail to prove that WWII ended The Great Depression
Great Myths of the Great Depression [PDF/ Audio] Lawrence W. Reed, President of FEE, confronts the many myths of The Great Depression and explains the often confusing history of policies leading up to the crash
The Clash of Economic Ideas [book]: Lawrence H. White’s book on how contrasting economic ideas have originated and developed over time to take their present forms
“Money For Productive Investment” vs. “Spending and Saving” [newspaper]: Primary newspaper clippings of Keynes and Hayek’s arguments on spending, savings, and government intervention as the Great Depression was playing out

The Surprising Answer for How to Handle The Next Recession 
In the Great Depression and in the recent Great Recession, policymakers were eager to do something to help failing businesses. Can you blame them? Who in his right mind would ever say do nothing? Well, in fact, as I discuss in my recent book, The Clash of Economic Ideas, in the early years of the Great Depression, one of the best known economists, Friedrich Hayek, gave a powerful argument for government doing nothing beyond maintaining the right monetary policy. This sounds counterintuitive, especially in the face of an economic crisis. So what could he have meant?
Hayek recognized that individual workers, entrepreneurs, and consumers know better than government what to do in their individual situations. An unemployed worker is the best manager of her own search for a new job that fits her talents. The owner of idle machines has the best knowledge of what those machines might contribute in new employments. Entrepreneurs stake their fortunes on figuring out how to combine resources like labor and machines into productive combinations. Consumers are the ultimate judges of which enterprises cost effectively meet their wants.
The call for government to do something takes it for granted that government knows what to do, knows how idled resources should now be redeployed. But in practice, government lacks this knowledge, and more often it makes wasteful decisions. It throws taxpayer money into losing ventures in the form of bailouts and subsidies. The results in the recent recession, the unusual slowness and painfulness of the recovery, can’t be encouraging for the “government should do something” view.
Having government decide means putting all our eggs in one basket. One bad decision can mean disaster for everyone. Decentralized decision making by individuals in the market won’t be mistake free, but each individual mistake will be smaller. More importantly, mistakes will be corrected promptly by the market system of profit and loss. Taxpayers will no longer prolong losing ventures at the expense of winning ventures that could use the same resources to produce more value. So the relevant question is not “do something” or “do nothing” about business failures. It’s, rather, do we rely on individual market actors to make their own decisions about what to do or on one central government? As Hayek asks, who plans for whom? Or to quote the refrain of a recent rap video, more bottom up or more top down?