A healing process or a deadly crisis?

The daily Financial Times has in recent days come up with two, in my opinion, very inspiring texts dealing with the role of governments during the current recession or crisis. An editorial published on 2 January points out that there is naturally a temptation to think that the world deserves crises and that it even needs recessions to counterbalance and pay for the unrestrained indulgence and feasting of previous years. The FT says that this view is wrong.

If we live beyond our means, then recessions are necessary, say the advocates of the Austrian School: The bad investments of the past years must be liquidated away. The incompetent and inefficient, as well as the charlatans and the fraudsters should be revealed and exposed. In 1934, economist Ludwig von Mises – a leading representative of the Austrian School – proposed that politicians restrict borrowing and raise interest rates to allow purifying forces to do their job in the economy. At the time of the worst social impacts of the Great Depression, von Mises warned that various artificial government stimuli eliminated those purifying forces that led economies out of crises during all previous depressions.

Such „liquidationism“, the FT says, makes for a nice morality tale: We have to reap what we sow. It is no coincidence that most Austrian School representatives were „socially conservative“. Economist John Maynard Keynes…