The reason for ignoring the WSJ – or at least its opinion pages – is that they many are not reality-based. They are misleading and use misinformation to make you afraid of certain people, ideas, and other institutions. Mark Spitznagel in his article The Man Who Predicted the Depression – Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy offers a nice example. Before I start criticizing it, lead me offer you my take on things.

The Great Depression called for explanations. Apparently, markets were not coming back to equilibrium, resulting in persistent unemployment and economic slump. Two questions were to be tackled: 1) What caused the Great Depression?, and 2) How do we get out? Roughly, Ludwig von Mises tackled the first one successfully and fumbled the second, while John Maynard Keynes skipped the first question, focussed on the second and got it right. This was the more important accomplishment, so that is why Keynes made it to the economic hall of fame while Ludwig von Mises did not. That, however, is not to say that von Mises is wrong or that Keynes would not agree with the answer von Mises provides for question 1). Here is an extract from ch. 22: Notes on the trade cycle, III:

The preceding analysis may appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest against a slump.

To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous.

So, even Keynes did not say that economists like von Mises which believe over-investment would cause recession were wrong. I would also agree with von Mises that over-investment is the candidate for causing business cycles. However, I would not agree that it is wrong monetary policy that causes these business cycles. Remember that in the 19th century we had no (modern) central banks, and still we had a lot of financial crises. Clearly the government was not responsible because it did not set interest rates – banks did.

As for the policy solution, von Mises proposed to do nothing and wait until the over-investment has been wiped out. This kind of ‘hands off’ policy was tried by Herbert Hoover, and it failed spectacularly, bringing about misery on a level not see in the US since the Civil War (don’t pinpoint me on this, though).

According to Keynes, the problem was that people could not save anymore, since there was nobody to invest the money. People started hoarding the money, and that meant that the drop in investment was not compensated. That drop led to unemployment, therefore to less income, which led to less demand. Because of this, firms invested even less, and this is where the vicious circle starts. The system ends up in an under-employment situation where it stabilizes. So, how do we get out of the slump?

Here is Keynes, ch. 22, II, on the use of monetary policy (my highlighting):

It is this, indeed, which renders the slump so intractable. Later on, a decline in the rate of interest will be a great aid to recovery and, probably, a necessary condition of it. But, for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough. If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case; and it is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a “purely monetary” remedy have underestimated.

Now Keynes says in his General Theory, ch. 18, II:

But an increase (or decrease) in the rate of investment will have to carry with it an increase (or decrease) in the rate of consumption; because the behaviour of the public is, in general, of such a character that they are only willing to widen (or narrow) the gap between their income and their consumption if their income is being increased (or diminished). That is to say, changes in the rate of consumption are, in general, in the same direction (though smaller in amount) as changes in the rate of income. The relation between the increment of consumption which has to accompany a given increment of saving is given by the marginal propensity to consume. The ratio, thus determined, between an increment of investment and the corresponding increment of aggregate income, both measured in wage-units, is given by the investment multiplier.

So, it is investment that has to be stabilized at a high level in order to lead to more (and finally to full) employment. If the private sector does not bring it about, the government should do so.

Now let’s get back to Mark Spitznagel’s article:

But then, just Mises’s bad luck, along came John Maynard Keynes’s tome “The General Theory of Employment, Interest and Money” in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government’s coffers.

He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn’t even refuted by Keynes and his ilk. He was ignored.

This is a misrepresentation of what Keynes had said. Besides that, the last paragraph is also non-sensical. Keynes was a speculator, and that meant he was rich. So, like every other wealthy man during that time, he lost money during the stock market crash. Also, the ‘fancy math (even Greek letters)’ will impress you only if you happen to be attending elementary school. Alfred Marshall in his Principles of Economics from 1890 had ‘fancy math’ in it. And ‘even Greek letters’? Spitznagel is a hedge fund manager, where they throw around with alphas and betas all the time. I guess he writes for the WSJ in order to promote the public good, not his hedge fund (or the next one).

Oh, and about the last issue of that short quote, that Keynes ignored von Mises: No, he did not. And I can prove it. (Being a scientist has its advantages.) See above.