Liquidation and Creative Destruction.

Abstract:

This paper denounce Keynes' theory which says that the level of Investment before 1929 was not the cause of the Depression that ensued.

It examines the validity of Liquidationism and the notions that relate to it.

As we get into the Liquidity Trap there will, of course, be a feud between the advocates of laissez-faire, the Liquidationists, and the advocate of government intervention, the Keynesians.

Although no one seems to have been Liquidationist (The Austrian school seems to say that they never were, contrary to the views of Brad deLong and Paul Krugman (The Hangover Theory.)) However, Friedrich August von Hayek have been a Liquidationist.

Another point of view is that of Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950), who invented the notion of Creative Destruction. This last notion is more about an economic Darwinism - which is relevant, according to him, whatever the state of the economy. It relates to the omnipotence of Markets. Refer to Chapter II, Paragraph5: The State of Long-Term Expectation. The Austrians were quick to point out that although Schumpeter was an Austrian economist he didn't belong to the Austrian school.

What we are concerned with is Liquidation in a Depression.

The Austrian School has always denied the existence of the Liquidity Trap, but Friedrich August von Hayek had his opinion on the Economic Depression:

"The second point is that up to 1927 I should, indeed, have expected that because, during the preceding boom period, prices did not rise-but rather tended to fall-the subsequent depression would be very mild. But, as is well known, in that year an entirely unprecedented action was taken by the American monetary authorities, which makes it impossible to compare the effects of the boom on the subsequent depression with any previous experience.

The authorities succeeded, by means of an easy-money policy, inaugurated as soon as the symptoms of an impending reaction were noticed, in prolonging the boom for two years beyond what would otherwise have been its natural end.

And when the crisis finally occurred, for almost two more years, deliberate attempts were made to prevent, by all conceivable means, the normal process of liquidation.

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