Max Walsh discovers the classical theory of the cycle

Maximillian Walsh has just re-discovered the classical theory of the cycle. This is from today’s AFR: The crises are different, but the cause is the same. Here is the sub-head:

In a global era, the next crisis is always just around the corner. The continuous expansion of debt is the cause at the bottom of all of them.

I suspect that we have been living in a “global era” for the last 250 years at least, so technically I suppose, he’s right. But I think he is trying to say there is something new in the world. He could, if he cared to look, find the same kinds of instability across the whole of the nineteenth century. If he would like to go back farther, I could send him to The Wealth of Nations, or he could investigate the Mississippi or South Sea bubbles, both eighteenth century.

The point is, of course, that with the advent of Keynesian economics, the classical theory of the cycle has disappeared. To my knowledge a full discussion is available from only a single source at the present time, although the Austrians are pretty close.

So yes, there is always another crisis around the corner, all the more so since those who manage our economies are the single most certain cause of it. The real question, then Max is this: what should we do, right now, to prevent this crisis from coming full term, or at least what can we do to make it less of a problem? For this, too, you need to go back to the classical theory of the cycle. They had no guaranteed answers either, but at least they knew what you should not do. And if you would like to see in action the kinds of things they would not have done, check out the Federal Reserve in the US, along with most of the other central banks in charge, and see what they are doing.

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5 Responses to Max Walsh discovers the classical theory of the cycle

  1. Bruce of Newcastle says:

    The continuous expansion of debt is the cause at the bottom of all of them.

    Very good Mr Walsh. The stock traders on margin were the ones passing your window at terminal velocity on 25 October 1929.

    Now Mr Walsh, can I ask you about very low interest rates? And government debt. Large government debts? Have you noticed Greece lately, Mr Walsh, and that our local deficit means we have to borrow $40 billion this year. And again next year. And then the year after that, and after that and…well I see you understand.

    Perhaps cutting spending is warranted…? I will be eagerly awaiting your next piece on the subject.

  2. Alfonso says:

    “The continuous expansion of debt is the cause at the bottom of all of them.”
    Don’t fret Max, there’s always a buck in the expansion of debt.
    I used to care, now I’m here to rape it commercially and all’s going very well, thanks.
    Please expand like the klappers.

  3. Mk50 of Brisbane, Henchman to the VRWC says:

    The global era?

    Started in 1820 when merchant ships developed sufficiently to move bulk agri-goods acrioss the Atlantic and make a profit.

    In 1820, ~92% of the human race lived in abject poverty.

    Since then, capitalism and trade has reduced that to less than 10%.

    See Surjit S Bhalla’s brilliant Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization (2002)

  4. egg_ says:

    the classical theory of the cycle

    Perhaps the Econotards who jumped on board the AGW bandwagon could acknowledge that long term weather is cyclical, too?

  5. Frodo says:

    Two things we might do in Australia to minimise the risks presented by global instability:
    1. Undo the subsidies and compulsions that have made our finance sector ridiculously large and inefficient; and 2. Undo the distortions in our domestic energy markets that allow companies to reserve large amount of gas and other fuels for their future exports and thus drive domestic gas prices to Japanese levels.
    Both would make Australian industry more competitive. Both would reduce risks related to our net foreign debt. Both would reduce imposed outcomes on the economy.

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