No, we didn’t.
Although a high number of the comments made about the causes of the Financial Crisis suggest that deregulation and a lack of control of the economy by the government led to the current Financial Crisis, it is exactly the other way around. It is the same misconception that was commonly accepted in the 1930s regarding the Great Depression.
The development before the current Financial Crisis was very similar to the years before the Great Depression. Again it was not laissez-faire what happened during that time but a high level of government intervention. Government spending of the United States has been over 40 percent of the national income for several years before the crisis, whose effects were already explained in an earlier chapter. Further evidence that there was no deregulation is the fact that to the Federal Register of regulations were added some ten thousand pages since 1978, now counting more than seventy thousand.
The main cause of the Financial Crisis, however, is the same as the one of the Great Depression: A poorly thought-out monetary policy. That’s not surprising because the Federal Reserve System still exists and works more or less the same way it did 80 years ago. It is not only the System that has certain flaws though; it is also the unwise way it is used.
Although the US economy is based on a market economy and has a lot of capitalist structures, it was not predominantly capitalism that caused the crisis but rather the Government interventions in the market.
Uncategorized
Deregulation, Financial Crisis, Government Intervention, Government Spending, Great Depression, Laissez-Faire
Capitalism
It is a commonly held belief that the Great Depression was caused by capitalism, which is “an economic system based on the private ownership of the means of production” which “also promotes a free market regulated by supply and demand.” Opponents of the Austrian economic school of thoughts, which was founded and developed by the three Austrian economists Carl Menger, Ludwig von Mises and Friedrich Hayak on the principles of capitalism, say that capitalism “suffers from certain inherent weaknesses” and “is by its very nature unstable.”
Therefore, according to them, in a free market economy a cycle of ups and downs is inevitable and occasional economic downturns like the Great Depression are the consequence. In the following I’m going to examine whether it is true that capitalism is to blame for the Great Depression and, if not, which the real causes were.
Laissez-faire or overregulation?
The person who made most of the important decisions regarding the economic policy in the 1920s and early 1930s in the United States was Herbert Hoover (1874-1964), first as secretary of commerce (1921-1929) and afterwards as president of the United States of America until 1933. He belonged to the Republican Party and was said to follow a policy of laissez-faire, which is hard to believe for me, knowing that the commerce department’s budget had more than doubled under Hoover and the number of bureaucrats also increased. Now, let’s have a look at what Hoover’s policy was like indeed:
From the day of his assumption of office Hoover started to regulate a lot of industries with the aim to reduce “destructive competition”. This way of thinking already shows that Hoover’s policy had nothing to do with laissez-faire, because the competition provided by a free market economy is characteristic and elementary for the Austrian economic school of thoughts. It is one of the most important capitalist lessons that competition is the source of any imaginable wealth, since wherever there is competition in the economy, companies will struggle for the consumer’s dollar by providing a better or a cheaper product for the consumer, this again leads to the incentive to innovate products and production methods. In short, competition makes companies more efficient and thus creates jobs and great prosperity.
Uncategorized
Capitalism, Great Depression, Laissez-Faire