Another common claim about stock-price gains in the 1920s is that they were made possible by Federal Reserve “inflation.” This view is held by many supposed free-market economists—monetarists and Austrians—and is certainly a tempting thesis for those who oppose central banking. But was Alan Greenspan correct when he wrote [in the Rand approved CUI], in the mid-1960s, that the late-1920s represented a “fantastic speculative boom” that was triggered by “excess credit” pumped out by the Fed—credit which then allegedly “spilled over into the stock market”? This view of the late-1920s stock-price rise could not be more wrong.
Why is Greenspan and the Austrians wrong? Salsman explains:
In the Austrian theory of business cycles, it is easy to detect a lack of appreciation for the intelligence, wisdom and foresight of entrepreneurs, businessmen and investors. Austrian economists presume producers are easily fooled by government manipulations of money, credit, and the economy—especially by the alleged phenomenon of “artificially” low interest rates. They claim producers are conned into undertaking projects that later will turn out badly and require liquidation. In fact, producers are not fooled; they know, even if implicitly, which government policies are conducive to wealth creation and which are destructive. That is, they know when it’s worth producing and when it’s only worth shrugging. And when they shrug and production grinds to a halt, it does not grind to a halt because they had previously produced.
When the Austrian view of the business cycle is coupled with a malevolent-universe premise—with the view that in the economy or stock market “what goes up must come down,” that “all good things must come to an end,” that no long ride of unbroken prosperity can ever persist without taking on irrationally exuberant hitchhikers—the combination can be catastrophic. For it can bring even purported champions of capitalism to openly endorse destructive policies such as Federal Reserve interest-rate hikes, curbs on the stock exchange, and more burdensome government regulations.
I will discuss Salsman’s theory of the entrepreneur in my next economics post. I merely here wish to note the obvious ideological origins of Salsman’s ideas. Elsewhere on the web, Salsman has given 12 reasons why he disagrees with “contemporary” Austrian economics. I won’t list all the twelve reasons, since all but two of his reasons are either based on a malicious interpretation of Austrian doctrines or an inability to understand even the most basic economic concepts. But the last reason he lists is the most glaring and fatuous of all and gives the whole game away. Salsman complains of the “animosity (and/or indifference) towards Ayn Rand and Objectivism” manifested by Austrian economists. In other words, Salsman resents the failure of Austrian economists to bend the knee at the altar of Rand. But is that any reason to disagree with someone—that they don’t worship your own private idols? Does Salsman refuse to get medical attention from any doctor who is indifferent (or who entertains animosity) towards Rand? Does he disagree with any specialist who, even though Rand herself recommended him, is not an enthusiastic admirer of Objectivist (or approved of by ARI)? Here we see, quite plainly, the poisonous fruits of ideology—that is, of making subservience to a system of ideas more important than any other consideration, including every consideration of truth, justice, fact and science.