Book Review: Meltdown

I picked up Meltdown, by Thomas E. Woods, because a short review posted on the website of the author’s institution, the Ludwig von Mises Institute.

It is a good introductory text on Austrian business-cycle theory, using the current financial collapse and economic malaise as the example of how government intervention in the economy is, and has always been, bad for economic stability, recovery and growth.  A few key passages grabbed me:

Woods explains clearly the “folly of public-works stimulus” in two key paragraphs (p. 78):

The economy is trying to readjust the allocation of capital and labor across the various stages of production, liquidating those concerns that are squandering wealth and directing resources into those lines in which healthy expansion is possible.  Additional public works spending is one of the last things the economy needs, for it (1) deprives the private sector of resources by taxing people to support these projects; (2) diverts resources towards firms that themselves may need to be liquidated; and (3) artificially drives up interest rates (if the projects are funded by government borrowing), thereby making bank credit more difficult to come by for firms that are actually producing things consumers have freely indicated they want…

…Government… has no non-arbitrary way of knowing how much of something to produce, where to produce it, using what materials and which production methods…

And later, he explains why government stimulus has an artificial influence on the economy (p. 122):

…When the government inflates the money supply, the new money does nto reach everyone simultaneously and proportionately.  It enter the economy at discrete points.  The earliest recipients of the new money include politically favored constituencies of one kind or another: banks, for example, or firms with government contracts – in other words, wherever government spends money.  These privileged parties receive new money before inflation has pushed prices upwards.  In effect, the economy doesn’t yet know how much the money supply has increased, and prices have not yet adjusted accordingly…   But while this process is taking place, the privileged firms that are lucky enough to get the new money early benefit from being able to make their purchases are the pre-existing price levels – thereby silently looting those from whom they buy.  When the average person gets his hands on this new money…   the value of his money was diluted by the new money before it ever reached him.

And finally, a very blunt statement about fiat money and central banking (p. 157):

If you believe in the free market, you cannot support central-planning of money…  …you cannot support government price-fixing, including the fixing of interest rates…   … free-market advocates know the correct answer: the more important a sector is, the worse a job government would do with it, and the more urgently it needs to be handled by free individuals subject to competition.

I was a follower of the Austrian school of economics before I read this book, but it helped me understand more clearly how obvious it is that current government action (not just in the United States) is folly and doomed to make this recession and it’s aftermath worse, not better.