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The Myth of the War Shock / Artikel mises.org

verfasst von - Elli -, 17.03.2003, 17:52

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The Myth of the War Shock
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By Frank Shostak

[Posted March 17, 2003]

The
Causes of American Business Cycles: An Essay in Economic Historiography,
Federal Reserve Bank of Boston,"Beyond Shocks," June 1998).

Shocks and Cycles

A free-market economy cannot be compared to an object that
moves along a particular trajectory. It is, instead, a process by which
producers exchange among themselves various goods and services. Through the
production of goods and services a producer acquires means that enables him to
secure the goods and services of other producers. In other words, a producer
exchanges things he has produced for things he prefers more.

In a free-market economy every producer pays for his
consumption, or funds his consumption, by means of the goods and services he
has produced. Whilst it is true that every producer generates his own funding,
it is however, the availability of final goods and services that are ready for
human consumption that ultimately determine peoples’ well-being. The stock
of these goods is what the pool of real funding is all about.

For instance a producer of bricks couldn't sustain his life
and well being if no one was producing food. Neither is it of much help to
build sophisticated machinery which will make it possible to produce more
sophisticated machinery, which in turn will make only a marginal contribution
to the production of final goods that are required for our life and well-being.
On the contrary, such activity only ties up scarce real funding, which amounts
to consumption that is not supported by useful production. This in turn leads
to a depletion of the pool of real funding which undermines the future
production of real wealth.

Clearly, as a result of uncertainty and various shocks projects
that businesspeople undertake might turn out to be un-profitable. The facts of
reality however will straighten out businesses very quickly and will force
them to make necessary adjustments in their activities if they want to stay in
business. In a free-market economy, therefore, the facts of reality make sure
that engagement in non-productive activities will not last for too long. The
facts of reality also make sure that consumption is fully backed up by a
preceding production of wealth.

So, while shocks can disrupt the pace of economic activity,
this has nothing to do with the phenomenon of recurrent boom-bust cycles. The
phenomenon of recurrent boom-bust cycles requires a mechanism that
persistently and systematically feeds and supports this phenomenon. The only
mechanism that does this is the monetary policies of the central bank and the
existence of the fractional reserve banking.

Monetary Policies and Cycles

While in a free unhampered market economy there is a
tendency towards a harmony between production and consumption, this is not so
when we introduce to our discussion the central bank, which disrupts this
harmony.

In a free unhampered market economy money facilitates the
exchange of production of one producer for the production of another producer.
In short, by means of money something is exchanged for something else. However
this is not so when the loose monetary policies of the central bank set in
motion the creation of money out of"thin air." The newly generated
money gives rise to an exchange of nothing for something.

It gives rise to consumption that is not supported by
production of real wealth. In other words, money out of"thin air"
gives rise to various activities that wouldn't emerge in a free-market
environment. It is the emergence of these non-productive activities that
constitutes the economic boom.  During an economic boom by means of money
out of"thin air" real funding is diverted from productive
activities to non-productive activities, which in turn weakens the production
of wealth.

Whenever the central bank tightens its stance, i.e., raises
interest rates and curtails monetary pumping, this undermines the existence of
various non-productive activities and threatens their existence. This is the
essence of an economic bust, or recession. Observe that a tighter monetary
stance slows down the diversion of real funding towards non-productive
activities, which in turn helps wealth generating activities.

It follows then that an economic bust is nothing more than
the liquidation of non-productive activities that have emerged on the back of
previous loose monetary policy of the central bank.

Note that the reason for the recurrent emergence of
boom-bust cycles is the fact that central bank authorities continuously pursue
so-called monetary policies that are aimed at navigating the economy toward a
path of stability and prosperity. Furthermore, note that a tighter stance is
bad news for non-productive activities and welcome news for wealth generators.
This is in contrast to mainstream thinking, which regards a tighter
monetary stance as bad news for all activities.

So if recessions are about the liquidation of non-productive
activities how do we categorise an event like a war? What is the contribution
of a war to a recession? As such war has nothing to do with the phenomenon of
a recurrent boom-bust cycle.

According to Murray Rothbard,

"Before the Industrial Revolution in approximately
the late eighteenth century, there were no regularly recurring booms and
depressions. There would be a sudden economic crisis whenever some king made
war or confiscated the property of his subject; but there was no sign of the
peculiarly modern phenomena of general and fairly regular swings in business
fortunes, of expansions and contractions" (Economic
Depressions: Their Cause and Cure, Mises Institute).

In contrast to recessions, or economic busts, which are
about the liquidations of non-productive activities, war on the contrary
contributes to the increase in non-productive activities. In short, war, in
contrast to an economic bust, gives rise to non-productive and destructive
activities, which undermine the pool of real funding, and therefore undermines
future prospects for economic growth. In this regard, it produces similar
results to that of an economic boom, i.e., it gives rise to non-productive
activities. Moreover, if the pool of real funding is expanding, war generates
an illusion of economic prosperity.

It follows then that the phenomenon of boom-bust cycles is
entirely on account of monetary policies of the central bank that gives rise
to the creation of money out of"thin air."  Moreover,
boom-bust cycles are not about the strength of the economy but about the
systematic reshuffling of the pool of real funding which is brought about by
monetary policies of the central bank. So-called economic strength is dictated
by the state of the pool of real funding. (It needs to be reiterated that by
reshuffling the pool of real funding loose monetary policy also undermines
this pool.)  This in turn means that boom-bust cycles are set in motion
regardless of the economy's strength.

In this regard, after falling to -0.3% in Q3 2001 the growth
momentum of real GDP has been in an up-trend since that period. Year-on-year
in Q4 the rate of growth stood at 2.9%, a marginal decline from the 3.3% in Q3
(see chart). This up-trend however, is most likely coming to an end. The
reason for that is a visible decline in the growth momentum of real money AMS
(Austrian School Money Supply). The yearly rate of growth of this monetary
measure fell from 9.4% in February 2002 to 3% in February 2003 (see chart).

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Summary and Conclusions

The likely emergence of an economic bust is not on account
of the looming war with Iraq as suggested by popular thinking, but rather the
outcome of the Fed's monetary policy. Boom-bust cycles are not caused by
various shocks including the shock of a war. The mechanism that is responsible
for the phenomenon of boom-bust cycles is central bank monetary policies.

While recessions, or economic busts, are liquidations
of non-productive activities, war on the contrary contributes to the increase
in non-productive activities. By reinforcing various non-productive activities,
war therefore sets the foundation for a much harsher economic adjustment some
time in the future.

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Frank Shostak is an adjunct scholar of the Mises Institute
and a frequent contributor to Mises.org.  Send him MAIL and
see his outstanding Mises.org Daily
Articles Archive.

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The Myth of the War Shock / Artikel mises.org - - Elli -, 17.03.2003, 17:52