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A healing process or a deadly crisis?

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The daily Financial Times has in recent days come up with two, in my opinion, very inspiring texts dealing with the role of governments during the current recession or crisis. An editorial published on 2 January points out that there is naturally a temptation to think that the world deserves crises and that it even needs recessions to counterbalance and pay for the unrestrained indulgence and feasting of previous years. The FT says that this view is wrong.

If we live beyond our means, then recessions are necessary, say the advocates of the Austrian School: The bad investments of the past years must be liquidated away. The incompetent and inefficient, as well as the charlatans and the fraudsters should be revealed and exposed. In 1934, economist Ludwig von Mises – a leading representative of the Austrian School – proposed that politicians restrict borrowing and raise interest rates to allow purifying forces to do their job in the economy. At the time of the worst social impacts of the Great Depression, von Mises warned that various artificial government stimuli eliminated those purifying forces that led economies out of crises during all previous depressions.

Such “liquidationism”, the FT says, makes for a nice morality tale: We have to reap what we sow. It is no coincidence that most Austrian School representatives were “socially conservative”. Economist John Maynard Keynes understood that during a deep recession, demand does not necessarily have to decrease to the “desired” level, but much lower, the FT says. The paradox of thrift appears: Instead of spending reasonably and sustainably, people do not spend at all and start saving money. Demand dries up and so does economic activity. That is why governments should boost demand by means of monetary and fiscal tools.

But still, the FT says, poor businesses must, of course, fail and politicians should not subsidise existing businesses. Politicians should not prevent the economy from adapting to new conditions. But governments have to cooperate and maintain demand on an international level.

The attractiveness of the Austrian School rests in its devotion to the free market. However, if there is any real threat to democracy and capitalism, then it is depression and high unemployment, not “counter-cyclical” fiscal policy.

In his FT column, Samuel Brittan develops the same idea. Recessions are said to have a meaning and a purpose, he says. They accelerate the destruction of wrongly targeted activities and overly speculative investment. This is what Austrian economist Joseph Schumpeter calls “creative destruction”. Brittan says this is only true to a certain extent.

A purification does not justify a secondary and tertiary liquidation of viable companies just because demand has collapsed. Schumpeter himself as a professor at Harvard changed his stance in the 1930s and became an advocate of massive fiscal stimuli. And yet another representative of the Austrian School, Friedrich Hayek, wrote in the 1970s that it is useful to distinguish between an inevitable recession and secondary depression caused by a cumulative loss of purchasing power. (However, Brittan says that Hayek himself did not distinguish this way back in the 1930s when he taught at the London School of Economics and was one of the main critics of Keynes’s ideas.)

Similar ideological disputes also appear in the Czech discourse. Especially thanks to President Klaus, the CEP, the Liberální Institut, the University of Economics, Prague (VŠE), and who knows what else, there is a strong group of advocates of orthodox libertarianism, an approach that criticises any government intervention and stimuli.

However, given the fact that our society is atheistic, our orthodox dogmatists lack that social-conservative or religiously-biblical (maybe also flagellant) dimension (“we have to reap what we sow”) suggested by the FT. The Czech right wing does not acknowledge Keynes, we can only hear about him from some economists close to the Social Democrats.

But maybe the Czech right wing should not miss the fact that in recent years, and especially in recent months, Keynes has been rehabilitated on a massive scale in the academic world as well as in the serious media mainstream (it is no small matter that the FT shares his ideas unanimously). It may be natural instinct. It is easy to demonstrate free-market muscles at a time of prosperity, but when the threat of a crisis comes, people become afraid and suddenly want the state to play an active role.

We can hear motifs of the above-mentioned “liquidationism” in the debate about the crisis or recession: A crisis eliminates the tumours of assembly plants created by the disgraceful Social Democratic governments by means of artificial incentives. This is probably an opinion advocated by Industry Minister Martin Říman, who has been thinking for a long time anyway that there is too much industry in our country.

The government long pretended that the crisis does not concern us. But what is important is that regardless of ideologies, fiscal stimuli will work normally, especially in the form of what economists call automatic stabilisers: increased social allowances and unemployment benefits.

There is a small problem in that the government has to demonstrate to the outside world that it wants to do something about the decline in demand (crisis, recession). However, with the budget approved based on dramatically overestimated spending, the government will boost demand (by means of increased expenditures and maybe even lower taxes) on the one hand and cut budget spending on the other hand.

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