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Austrian predictions

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This page attempts to list various predictions made by Austrian economists about important economic and other developments.

Important note: Austrian economists, as Austrian economists, or praxeologists, do not predict. They can predict not as formal economists, or praxeologists, but, rather, in their role as thymologists, or economic historians. In praxeology, A causes B, other things remaining the same. But, in the real world, other things cannot be relied upon to always remain constant. Therefore, predictions of the "A will necessarily lead to B" type are strictly prohibited. Instead, praxeologists, but not thymologists, must limit themselves to statements of the if-A then-B variety.

With this in mind, it is interesting that Austrian economists have been quite successful at predicting major events.[1]

The Great Depression[edit]

The Great Depression was predicted by several Austrian economists:

  • In Austria, economist Ludwig von Mises saw the problem developing in its early stages and predicted to his colleagues in 1924 that the large Austrian bank, Creditanstalt, would eventually crash. He wrote a full analysis of Irving Fisher’s monetary views, published in 1928, where he targeted Fisher’s reliance on price indexes as a key vulnerability that would bring about the Great Depression, concluding: "because of the imperfection of the index number, these calculations would necessarily lead in time to errors of very considerable proportions."[2]
  • F. A. Hayek published several articles in early 1929 in which he predicted the collapse of the American boom.[citation needed] Felix Somary, who like Mises was a student at the University of Vienna, issued several dire warnings in the late 1920s.[citation needed][3]
  • In America economists Benjamin Anderson and E.C. Harwood also warned that the Federal Reserve policies would cause a crisis, and like Somary, they were largely ignored.[3] Albert H. Wiggin summed up in 1931 that the "depression has been prolonged and not alleviated by delay in making necessary readjustments."[4]

Post-WWII recovery[edit]

In the 1945 symposium Financing American Prosperity, several prominent economists discussed the financial and other economic problems of the transition after World War II and suggested solutions. With the exception of Benjamin Anderson, who called for "drastic economies in the postwar period" and insisted that "proposals for expanding federal expenditures after the war must be fought all along the line", the contributors all advocated a scope of federal expenditures much larger than that before the war.[5]

The "Depression of 1946" may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that "the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls." After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. However, the government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent what the historian Jack Stokes Ballard referred to as the "shock of peace."

If the wartime government stimulus had ended the Great Depression, its winding down would certainly lead to its return. At least that was the consensus of almost every economic forecaster, government and private. In August 1945, the Office of War Mobilization and Reconversion forecast that 8 million would be unemployed by the spring of 1946, which would have amounted to a 12 percent unemployment rate. In September 1945, Business Week predicted unemployment would peak at 9 million, or around 14 percent. Leo Cherne of the Research Institute of America and Boris Shishkin, an economist for the American Federation of Labor, forecast 19 and 20 million unemployed respectively — rates that would have been in excess of 35 percent!

After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. Some workers voluntarily withdrew from the labor force, choosing to go to school or return to prewar duties as housewives. But, many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production—in fact civilian employment grew, on net, by over 4 million between 1945 and 1947. Household consumption, business investment, and net exports all boomed as government spending receded.[6]

End of the Bretton Woods system[edit]

The collapse of the Bretton Woods System and the following rise of the gold price has been predicted by several Austrian economists and is covered in the following:

Savings and loan crisis[edit]

In his 1982 introduction to America's Great Depression, Murray Rothbard predicted the Savings and loan crisis and hinted at trouble in the stock market:

"... The fact that Reaganomics cannot bring down interest rates for long puts a permanent brake on the stock market, which has been in chronic trouble since the mid-1960s and is increasingly in shaky shape. The bond market is already on the way to collapse. The housing market has at last been stopped short by the high mortgage rates, and the same has happened to many collectibles. Unemployment is chronically higher each decade, and is now at the highest since the Great Depression, with no sign of improvement. The accelerating inflationary boom of the three decades since the end of World War II has loaded the economy with unsound investments and with an oppressive mountain of debt: consumer, homeowner, business, and international. In recent decades, business has in effect relied on inflation to liquidate the debt, but if "disinflation" (the lessening of inflation in 1981 and at least the first half of 1982) is to continue, what will happen to the debt? Increasingly, the answer will be bankruptcies, and deeper depression. The bankruptcy rate is already the highest since the Great Depression of the 1930s. Thrift institutions caught between high interest rates to their depositors and low rates earned on long-time mortgages, will increasingly become bankrupt or be forced into quasi-bankrupt mergers with other thrifts which will be dragged down by the new burdens. Even commercial banks, protected by the safety blanket of the FDIC for half a century, are now beginning to go down the drain, dragged down by their unsound loans of the past decade."

Dot-com bubble[edit]

Main article: Austrian predictions/Dot-com bubble

The Dot-com bubble and its bust was foreseen by several Austrian economists.[7] In October, 1999, Sean Corrigan pointed out a massive bubble and implied it will burst. He compared the conditions to those during the late summer of 1987, the Japanese bubble of the late 1980s, and the "roaring Twenties" in the United States. [8] In March, 2000, Christopher Mayer noted that all the ingredients of a bubble - fundamental (i.e., a technological revolution), financial (i.e., a surge in money and credit) and psychological (i.e., a suspension of belief in traditional valuation measures) - appear to exist in the current bull market and predicted it will end with a bust.[9] In August, 2000, William Anderson pointed to the bubble in the high-technology sector, mentioned the negative consequences of a regulatory attack at Microsoft[10] (which was analyzed a year earlier by Thomas DiLorenzo[11]). There were others.

Reference shortlist:
Anderson, 2000; Corrigan, 1999; Deden, 1999; DiLorenzo, 1999; Grant, 1996A, 1996B; Hülsmann, 2000; Mayer, 2000; Paul, 2000; Reisman, 1999; Sennholz, 2000; Shostak, 1999; Thornton, 2000.

Housing bubble[edit]

Main article: Austrian predictions/Housing bubble

During and after the burst of the Dot-com bubble, numerous economists predicted the 2000s housing bubble that culminated in the Great Recession from 2008 onward.

In 2002, Robert Blumen summed up the effect of the activities of Fannie and Freddie on the housing market as shows the systemic risk and foresaw a coming bailout.[12] Sean Corrigan pointed to the blooming real estate business among all the bankruptcies, and noted that real estate bubbles tend to pop several years after stock market bubbles, and that mortgages may fare much worse compared to stocks... along with their owners.[13] Congressman Ron Paul criticized government involvement in housing, and said that like all artificially created bubbles, the boom in housing prices cannot last forever.[14]

In 2004, Mark Thornton wrote that higher interest rates (indicated by the Fed) "should trigger a reversal in the housing market and expose the fallacies of the new paradigm, including how the housing boom has helped cover up increases in price inflation. Unfortunately, this exposure will hurt homeowners and the larger problem could hit the American taxpayer, who could be forced to bailout the banks and government-sponsored mortgage guarantors who have encouraged irresponsible lending practices."[15] Later on, he spelled out the consequences for the construction industry, unemployment, foreclosures, bankruptcies, bailouts of banks and GSEs, and a long recession.[16]

Stefan Karlsson wrote that the next crisis will be more serious than the mild recession of 2001 one; as it is, in fact, that very same crisis, only postponed.[17]

In 2005, Doug French after observing the mania in Vegas, quipped "condos are the last segment of the housing market to catch fire in a boom and the first to crater in a bust.", and concluded that the bust must be close.[18] Gary North warned against the danger of ARMs (adjustable rate mortgages).[19]

Investor Peter Schiff acquired fame in a series of TV appearances (most in 2006 and 2007), where he opposed a multitude of financial experts and claimed that a bust was to come.[20] He was warning about the speculation, ARMs, houses that couldn't be sold, people walking away from them and coming bailouts for several years before in print.[21][22][23]

Reference shortlist:
Anderson, 2001, 2003, 2007; Armentano, 2004; Beale, 2009; Blumen, 2002, 2004, 2005; Corrigan, 2002; Crovelli, 2006; DeCoster, 2003; Duffy, 2005A, 2005B, 2005C, 2005D, 2006, 2007A, 2007B, 2007C, 2007D; Economics of contempt, 2008; Englund, 2004, 2005A, 2005B, 2005C, 2005D, 2006, 2007, 2008; French, 2005; Grant, 2001; Karlsson, 2004; MacKenzie, 2003; Mayer, 2003; Mueller, 2004; Murphy, 2007, 2008; North, 2002, 2005; Paul, 2000, 2002, 2003; Polleit, 2006; Ptak, 2003; Rockwell, 2002, 2008; Rogers, 2005; Schiff, Undated A, Undated B, Undated C, Undated D, 2003A, 2003B, 2003C, 2004A, 2004B, 2005A, 2005B, 2005C, 2005D, 2006A, 2006B, 2006C, 2007A, 2007B; Sennholz, 2002; Shostak, 2003, 2005; Thornton, 2004A, 2004B, 2005A, 2005B, 2005C, 2006, 2007A, 2007B, 2007C, 2007D; Trask, 2003; Wenzel, 2004; See also Woods (2009, p. 188 for further bibliography).

Other predictions[edit]

  • The Skyscraper index shows a correlation between the construction of the world's tallest buildings and impending financial crises. While not developed by Austrian economists, it is compatible with their views about the business cycle.[24]

References[edit]

  1. Walter Block. Austrian Thymologists Who Predicted the Housing Bubble, LRC.com, December 22, 2010. Referenced 2011-11-29.
  2. Ludwig von Mises. "The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression", collection of works reposted from 1923 and 1928. Referenced 2011-01-12.
  3. 3.0 3.1 Mark Thornton. "Mises vs. Fisher on Money, Method, and Prediction: The Case of the Great Depression" (pdf), p.13-15; December 2006. Referenced 2011-12-13.
  4. Murray N. Rothbard. America's Great Depression, Chapter 9, referenced 2011-01-11.
  5. Contributors: Benjamin M. Anderson, John Maurice Clark, Howard S. Ellis, Alvin H. Hansen, Sumner H. Slichter and John H. Williams. Editors: Paul T. Homan, Fritz Machlup. Financing American Prosperity, A Symposium of Economists. The Twentieth Century Fund, first published October 1945. Referenced 2012-05-04.
  6. Jason E. Taylor and Richard K. Vedder. "Stimulus by Spending Cuts: Lessons from 1946" (pdf), Cato Policy Report, May/June 2010, Vol. XXXII No.3, referenced 2012-05-04.
  7. Mark Thornton. "Who Predicted the Bubble? Who Predicted the Crash?" (pdf), The Independent Review, v. IX, n. 1, Summer 2004, ISSN 1086-1653, Copyright © 2004, pp. 5–30. Referenced 2011-12-13.
  8. Sean Corrigan. "Will the Bubble Pop?", Mises Daily, October 18, 1999. Referenced 2012-01-08.
  9. Christopher Mayer. "The Meaning of 'Over-Valued'", Mises Daily, March 30, 2000. Referenced 2011-12-13.
  10. William L. Anderson. "New Economy, Old Delusion", The Free market, August 2000, Volume 18, Number 8. Referenced 2012-01-08.
  11. DiLorenzo, Thomas J. "Regulatory Sneak Attack.", Mises Daily, September 16, 1999. Referenced 2012-01-08.
  12. Blumen, Robert. "Fannie Mae Distorts Markets", Mises Daily, June 17, 2002. Referenced 2011-01-10.
  13. Corrigan, Sean. "The Trouble with Debt", Mises Daily, July 01, 2002. Referenced 2011-01-10.
  14. Paul, Ron. "Testimony to U.S. House of Representatives", July 16, 2002. Referenced 2011-01-10.
  15. Thornton, Mark. "Housing: too good to be true." June 4, 2004. Referenced 2011-01-10.
  16. Thornton, Mark. "The Economics of Housing Bubbles", June 2006, p. 27, 29, 31. Referenced 2011-01-10.
  17. Karlsson, Stefan. "America's Unsustainable Boom", Mises Daily, November 8, 2004. Referenced 2011-01-10.
  18. French, Doug. "Condo-mania.", Mises Daily, July 11, 2005. Referenced 2011-01-10.
  19. North, Gary. "Surreal Estate on the San Andreas Fault.", November 25, 2005. Referenced 2011-01-10.
  20. Schiff, Peter. "Peter Schiff Was Right" (video). Referenced 2011-01-10.
  21. Schiff, Peter. "Fed official admits the emperor has no clothes!", Commentary, March 10, 2003. Referenced 2011-01-10.
  22. Schiff, Peter. "In Arm's Way: The Tender Trap of Adjustable Rate Mortgages.", Commentary, May 7, 2004. Referenced 2011-01-10.
  23. Schiff, Peter. "Housing Speculation is More Rampant Than You Think.", Commentary, July 5, 2005. Referenced 2011-01-10.
  24. Mark Thornton. "Skyscrapers and Business Cycles", Mises Daily, August 23, 2008. Originally appeared in the Quarterly Journal of Austrian Economics vol. 8, no. 1 (Spring 2005) - PDF. There is also an MP3 audio file read by the author. Referenced 2011-12-13.

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