12-01 These days, there is a vogue among ordinary people rather than serious scholars to blame all evils of economic crisis on capitalism or free market. The fact that must be emphasized is that this is not as clear as you think. We are not living in a perfectly free market society. This is why problems that were seemingly created by the market are often found out as problems created by intervention of the government.
12-02 Economists have different interpretations about economic crises that seem to occur periodically. (This is not particularly distinctive compared to the difference in opinions about complex topics easily shown among theoretical physicists. Refer to Chapter 9 about complexity of the work analyzing human society as a complex system.) Here, I would like to briefly introduce the view of Austrian school that succeeded in most accurate and persuasive prediction of recent crisis.
12-03 In free market, interest rate balances demand and supply of loan fund. If banks can only give loans using deposited money, excessively low interest rate will result in overly high demand for loans. This cannot be maintained, as other overly low prices cannot. However, central banks can actually give out loans using money newly printed out. Therefore, low interest rate can be maintained as long as sustainable increase in money supply is accompanied.
12-04 Low interest rate allows entrepreneurs to easily make adventurous investments, which brings temporary economic boom. But is this really sustainable? Interpretation on economic crisis by Austrian school is simple. The government - more accurately the central bank - always attempts to create artificial economic boom by dropping interest rate below the level of free market, which inevitably leads to collapse.
12-05 Consider the following case: A baker bakes 10 breads and consumes 2 breads himself. He sells 8 breads to a wholesaler and receives 8 dollars to save all of this money in a bank. The bank gives out 8 dollars as a loan to a shoemaker. The shoemaker buys bread using his loan. The 8 breads will feed the shoemaker while he makes his shoes. This process can continue on because there is an actual saving that allows all production projects to be completed.
12-06 However, the story must be changed if loan is given out using printed money: A baker bakes 10 breads. He consumes 2 breads and sells remaining breads. He earns 8 dollars and saves all of it in a bank. The bank lends 8 dollars to a shoemaker. As another shoemaker asks the bank to give out a loan of 8 dollars, the bank prints out 8 dollars. Such economy cannot be maintained because there is no actual saving that allows all production projects to be completed.
12-07 This story gives exactly the same lesson as what we discussed in Appendix A: Since we purchase production factors using money, it is easy to think that unlimited money - or abolishment of money system - will allow us to utilize abundant production factors. However, this thought is a complete delusion. We cannot increase the amount of production factor used in a place without reducing the amount of production factor used in another place.
12-08 Therefore, the solution to economic crisis by Jacque Fresco and Peter Joseph is untrustworthy. This is because it replaces the large and hollow investments encouraged by the government today by even larger and hollow investments through abolition of money. An architect cannot accomplish his plan to build a gigantic house without accurately knowing the amount of bricks he has. His plan must be stopped at one point, but the pain he needs to endure because of it is unrelated to existence of money.
12-09 As we verified in Chapter 6, many communistic societies initiated unrealistic plans. Most of them were not completed until the last moment. (In fact, completed plans resulted in greater damage because production factors had to be drawn out of more valuable places.) Since the market did not have self-purification function, economic crisis was chronic. As a result, we do not even say that economic crisis occurred in these nations.
12-10 The biggest crisis is not created by the market but by intervention. Today's governments intentionally intervene in the loan market to create artificial economic boom. However, such intervention always brings overall collapse of the entire economy. This is the identity of the Great Depression in 1930s and economic crisis we now experience. The solution is simple. It is to prevent expansion of money. Austrian school argues for the gold standard and abolition of the central bank system. Milton Friedman argues for normative system.
12-11 Since the theory of Austrian school is only one of many interpretations on economic crisis, we do not have to accept it. However, it must be pointed out that interpretation by Jacque Fresco and Peter Joseph cannot be its alternative. According to Jacque Fresco and Peter Joseph, market economy will collapse by unemployment from automation - which is somehow called the Gaussian curve for some reason. This theory clearly cannot explain the crisis today.
12-12 When did economic crisis begin with reduced purchasing power caused by unemployment? Unemployment has never been a cause of economic crisis. It was the consequence. Today's economic crisis began with collapse of bubble as the economic crisis of 1930s did. Other consequences expected to be caused by large scale automation never occurred. Consumer goods were never oversupplied. Bubble always occurred in real estate and capital goods industry.
12-13 Speaking of real estate bubble, it is easy to denounce imperfectness of human beings and their greed to irrationally bear risks - or capitalism, which is often claimed to create such things. The truth is that it is impossible to discuss about bubbles without mentioning the environment created by the government. A cheap money policy preceded the real estate bubble of Japan in 1980s and economic booming of the United States prior to the Great Depression. However, this fact has never drawn attention of economic planners.
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