The 2008 fiscal crisis isn’t yet a distant memory, with stagnating effects still rippling through the economy after years of aggressive government intervention. It’s difficult to use counterfactuals in public policy discussions in a way that convinces opposing viewpoints. We can’t actually run back the clock to observe how a different scenario would have played out if only different choices had been made at the time. Instead, we have to turn to economic theory and historical case studies.
What if, instead of intruding and interfering when a recession begins, political authorities instead take a hands-off approach? In his remarks at the 2015 Friedrich Hayek Lecture and Book Prize, an annual event sponsored by Atlas Network partner the Manhattan Institute, James Grant drew from the lessons of an episode from history that serves as a successful example of non-interventionist policy. Grant’s winning book, The Forgotten Depression: 1921: The Crash That Cured Itself, examines how the federal government responded to a deep economic slump in the early 20th century by cutting spending, balancing the budget, raising interest rates, and spending nothing on “stimulus” packages. Within a year, the nation saw a strong economic recovery.
In his lecture, Grant mused on how our current moment would be different if Ben Bernanke and other policymakers had reacted to the crisis of 2008 through the lens of the strategy that had worked at the beginning of the Warren G. Harding administration when it faced a severe depression, instead of their misplaced speculations about what may have alleviated the Great Depression of the 1930s.
During a private dinner that followed the lecture, Grant explored his argument that, a century ago, there was no discussion of “the economy” as an abstraction that could be managed by political bodies. Individuals spoke of good times and bad times, but without the conceit that government could or should interfere with price signals that reflected market realities.
“It falls today to political economists to explain that macroeconomics is really just politics with differential equations in the appendix to legitimize it as a discipline,” Grant said.
Other finalists for Manhattan Institute’s 2015 Hayek Book Prize included The Market and Other Orders (The Collected Works of F.A. Hayek), edited by Bruce Caldwell; Putin's Kleptocracy: Who Owns Russia?, by Karen Dawisha; The Tyranny of Experts: Economics, Dictators, and the Forgotten Rights of the Poor, by William Easterly; The Rule of Nobody: Saving America From Dead Laws and Broken Government, by Philip K. Howard; and Recasting India: How Entrepreneurship is Revolutionizing the World's Largest Democracy, by Hindol Sengupta.
The Hayek Lecture and Book Prize at the Manhattan Institute has been underwritten since 2005 by the generous support of Thomas and Diane Smith.
Learn more about the Friedrich Hayek Lecture and Book Prize.