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OpEdNews Op Eds    H3'ed 7/2/09

Liquidation and Creative Destruction.

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Plea for a New World Economic Order. Chapter II, Paragraph 3:
Liquidation and Creative Destruction.
"I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment.

I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity... [p. 349]"

John Maynard Keynes
The General Theory and After.
Part I, Preparation.


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. It seems to me that these facts have had a far greater influence on the character of the depression than the developments up to 1927, which from all we know, might instead have led to a comparatively mild depression in and after 1927."

Friedrich August von Hayek (8 May 1899 - 23 March 1992) Price and Production. Capital and Industrial Fluctuations
A Reply to a Criticism Paragraph X September 1931

I am going to be the Devil's advocate and show that there is some truth in that belief!

I should have called this tract: "Torah, Qu'ran, Adam Smith, Karl Marx, John Maynard Keynes, Friedrich August von Hayek and Alan Greenspan, a reconciled and unified view!"

The John Maynard Keynes' Fallacy:

No one is perfect and my idol [No one should have one!] did make a mistake, he said:

"It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much over-expansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the Mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

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Shalom P. Hamou Tel Aviv, Ramat Aviv, Israel I am the youngest economist at My Yield Curve. Since spring of 1994 I have been working on economic depressions. I am writing The Tract The Religious Interpretation of (more...)
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