Free markets and sound history: An Interview with Thomas Woods

Thomas Woods is a prolific author and historian at the Ludwig von Mises Institute in Auburn, Alabama. He holds a bachelor's degree in history from Harvard and a Ph.D. from Columbia. Dr. Woods is the author of nine books, including the New York Times bestseller: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

He recently took a few minutes to speak with us about his new book, Austrian Economics and revisionist history.

Your explanation of the cause of the ongoing recession runs contrary to just about all mainstream economic thought. Can you summarize your view and tell us why you think it's correct?

These days, I rather doubt anyone cares whether a particular point of view is shared by a majority of economists. The vast bulk of mainstream economists utterly failed to predict the present crisis. I certainly wouldn’t use these people as a bellwether of respectability!

Much more important is that the explanation I put forth in my book Meltdown is the one shared by virtually all the economists who did predict the crisis. That must count for something, right?

My book looks at the current disaster in light of the work of F.A. Hayek, who won the Nobel Prize in economics in 1974 for his contributions to something called Austrian business cycle theory (ABCT) – the single most important piece of economic knowledge for Americans to have right now. Our central bank, the Federal Reserve System (or simply “the Fed”), can artificially lower interest rates by increasing the supply of money—and thus the funds banks have available to lend—through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on investments that the artificially low rates seem to validate but that cannot be sustained under existing economic conditions. Unprofitable investments are made to seem profitable, and over time the result is the squandering of untold resources in lines of investment that should never have been begun in the first place.

If lower interest rates are the result of increased saving by the public, those greater saved resources provide the means with which to see the additional investment through to completion. But the situation is very different when lower interest rates result from the Fed’s creation of new money out of thin air. In that case, lower rates do not reflect an increase in the pool of savings from which investors can draw. Fed tinkering, in other words, does not increase the real stuff in the economy. The additional investment that the lower rates encourage therefore leads the economy down a path that is not sustainable.

Just as producers are engaged in unsustainable projects, consumers also embark on unsustainable paths. In our day, for instance, seemingly ceaseless home appreciation led people to the false conclusion that they were richer than they really were. (Fed economists, moreover, assured them that there was nothing phony, artificial, or temporary about this spike in home prices.) They made borrowing and consumption decisions they would not have made if they had been able to see their net worth clearly. The housing bubble that created all this confusion was a direct result of the Federal Reserve’s interventions into the economy, flooding the market with cheap credit and artificially stimulating home production (and prices).

Although the Austrian theory of the business cycle has started to receive some recognition lately, it has been largely ignored by the academic establishment. Why do you think this is?

You can’t curry favor with the powers that be by endorsing a view that blames economic downturns on them, and that refuses to flatter them by proposing that only by granting them more power can we bring the recession to an end.

On a more innocent note, though, the problem in part is that the mainstream’s view of capital is so simplistic and unrealistic that many economists aren’t even speaking the same language as proponents of ABCT, who employ a far more sophisticated and realistic capital theory. They’re operating from a different paradigm.

I find it revealing that ABCT is much more readily accepted by people in the financial world, who deal directly with financial markets every day, than it is by academic economists whose models are far removed from real-world conditions.

Some on the left argue that behavioral economic research demonstrates that humans are irrational and thus proves the need for government intervention in the economy. How do you respond to that assertion?

My initial response, perhaps too flippant, would be: who will be staffing the government, then? Robots? Why would government activity, which is also carried out by human beings, be any more rational than the supposedly irrational decisions of individuals (which is all the market is)? Anyone who believes government is motivated by reason and the common good is probably beyond hope. The incentive structure that exists within government has nothing to do with pursuing justice, prosperity, etc.

But beyond this, I’d need more specifics: what exactly do they consider irrational? And why are they so sure violence (which is what government action at its root amounts to) can improve things? Aren’t we taught from childhood to employ violence only as a last resort?

You’ve made a career out of cataloging historical fallacies and then refuting them, why do you think so much bad history persists in American universities and popular culture?

It serves a purpose. People who believe that in the old days the bad monopolists ran roughshod over the little guy – which is how I myself was taught nineteenth-century economic history – are more likely to support measures to cripple producers today. (“Why, if we have an unhampered free market, greedy people will exploit the public!” Etc.) People who believe the notion of “states’ rights” is inextricably tied in with slavery and segregation will endorse political centralization and oppose local self-government today.

There is no market for bad physics. There is no market for bad chemistry. But there is a market for bad history (as well as bad economics). Government is the biggest buyer in that market. History is typically employed by governments not as a potential source of wisdom but as an ideological bludgeon on behalf of its own agenda. I’ve done my best to overturn the propaganda, mainly in The Politically Incorrect Guide to American History(a New York Times bestseller for 12 weeks) and 33 Questions About American History You’re Not Supposed to Ask.

Which president, intentionally or unintentionally, did the most to promote free markets and individual liberty?

Warren Harding is one of the presidents we're taught to dislike, and who is consistently disparaged in the Officially Approved Version of American History that American students have the misfortune of encountering in their classrooms. He was "corrupt," we're told. In fact, the level of corruption in his administration was laughably minuscule compared to the routine lies and scandals we now take for granted as part of American life.

The fact is, he understood how the economy worked better than any other twentieth-century American president. He understood that you don't try to pump up deflated bubbles. You don’t use “fiscal stimulus,” the juvenile approach recommended by people we laughingly refer to as experts today. None of this gets to the root of the problem, which is that a previous credit expansion by the Fed created imbalances in the economy that can be corrected only by free individuals reallocating resources in light of an unhampered price system. So-called stimulus programs today actually disrupt this healthy process.

The U.S. endured a terrible depression in 1920-21. The federal budget was cut in half, and the Fed was largely passive. The result was the beginning of recovery by the summer of 1921. A speech I delivered on this subject has had 33,000 views on YouTube. It's called “Why You’ve Never Heard of the Great Depression of 1920.”

What is your next book going to be about?

I'm still thinking about it. I’ve been working very hard the past several years and producing books at quite a clip, so I may take my time with the next one.

How much more pleasant would your life be if Paul Krugman retired and took up gardening?

The population of active charlatans would be reduced by one, and I wouldn't have to endure the irritation of seeing primitive fallacies being peddled as genius. (I recommend my article “Krugman Failure, Not Market Failure.”)

For more on Thomas Woods please visit:
www.thomasewoods.com

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