It Didn’t Have to Be This Way: Why Boom and Bust Is Unnecessary—and How the Austrian School of Economics Breaks the Cycle
by Harry C. Veryser.
ISI Books, 2013.
Hardcover, 318 pages, $29.
It is rare for an American manufacturing executive operating in the domestic automotive industry to write a book with academic cachet. Harry Veryser’s market-informed work is even more unusual because it advances dialogues with non-classical liberals including social Catholics and Keynesians.
Veryser has real-life experience with the business cycle, working several decades with his family’s business, which operated for more than a half-century in Detroit’s rough-and-tumble automotive industry. The firm supplied stampings to automotive manufacturers including General Motors. Pupils of enterprise, whether entrepreneurs or students enrolled in universities will find Veryser’s examination of the “modern economic condition” of theoretical and practical use.
The work is influenced by the insights of Austrian School economists. Veryser identifies Austrians with “the traditional position of economics among the sciences of human action,” tracing the idea to Aristotle and Thomas Aquinas. Economics is, as Aristotle knew, most certainly a science of human action. Veryser reminds us the term “economics,” originates from the Greek oikonomia, a reference to the management of a household, the core element of human action. An emphasis on deduction, Veryser notes was first put forth by Aquinas in speaking about the method of the human sciences in his Commentary on the Nicomachean Ethics. Austrians, in the tradition of Aristotle and Aquinas, see economics as a practice of science that deals with human nature and choices. They believe that certain, very general laws of human action can be discerned by observation and deduction.
These references to Aristotle and Aquinas are strategic. Veryser, an economics professor at the University of Detroit, a Jesuit institution of higher learning, is laying the foundation for a dialogue with social Catholics. His approach is subtle, though references to Catholic popes underscore his intent. There is Leo XIII, a property rights proponent; Benedict XV, who had “worked ceaselessly for peace” in an attempt to prevent World War I; and John Paul II, influenced by the philosopher Franz Brentano, “a colleague and friend of, and an important philosophical influence on, Austrian School founder Carl Menger.” John Paul II knew of Brentano’s influence from his studies of phenomenologist Edmund Husserl, a Brentano student. Veryser appeals to Catholic social liberals by identifying markets with peace. He accomplishes this by identifying limited government with Catholic subsidiarity as “a response to the rising threat of totalitarian ideologies.” Subsidiarity calls for economic activities to occur at the most decentralized, non-centralized government level
Unlike others in today’s public square, Veryser is non-polemical, advancing arguments beyond the typical right-left shout-fest, though he is more vocal in his criticism of mainstream economics. The field, he argues, suffers from a “misguided and dangerous” over-reliance on mathematical models. Veryser includes the Fed, arguing the central bank contributed to recent economic crises including dot-com and housing bubbles. He provides a short history of the Austrian School, noting its predictions, “particularly regarding the fall of communism and socialism,” an insight traceable to Ludwig von Mises and Nobel Laureate Friedrich Hayek. Mises was the first to argue economic calculation under socialism was impossible due to the lack of a price system. Hayek stressed that central planners lacked the knowledge to plan a complex economy.
Veryser notes Austrian warnings about the role that credit expansion played in recent financial bubbles. “There is perhaps no more complicated problem in economics than the trade cycle,” he writes. In the Austrian view, the cycle starts with a credit expansion that lowers interest rates. This sets off an apparent boom, but in fact the credit expansion, because it does not spread equally throughout the economy, creates distortions that will lead to a bust. The boom begins in the capital goods sector, where Veryser spent his manufacturing career. Low interest rates fund major and long-term projects. Artificially low rates and apparent prosperity lure industries into making malinvestments, exposed in the cycle’s bust stage.“The effects of credit expansion,” Veryser writes, “spread well beyond banks and capital goods industries to other businesses, the stock and bond markets, mortgages, consumers, governments, and much more. Throughout the economy the credit expansion leads individuals, businesses and governments to make economic decisions based on false expectations.” The explanation, though technical, can help families and small businesses navigate the cycle through prudence and savings in the boom, which allows them to survive the bust.
Veryser also challenges liberals to read Keynes, arguing, “Keynesians share the Austrian view that business fluctuations are closely connected to imbalances between savings and investment.” They only disagree on causes. Austrians attribute fluctuations to credit expansion. Keynesians cite a decline in consumption. Veryser returns to this theme throughout his book, citing Keynes on La Belle Epoque prosperity; money supply manipulation; credit expansion’s possible consequences; and skepticism about mathematics’ role in economics.
The book’s most practical section cites examples from the automotive industry to explain economic ideas. Veryser discusses the Ford Motor Company, specialization and division of labor, and cyclical change in the domestic auto industry prior tothe emergence of Japanese automakers. One hopes that Veryser writes more about economic fluctuations: his family’s stampings business survived ten NBER-identified recessions from the 1940s to the 1990s. Though left unsaid, Veryser leads us to consider an alternative world where prudent fiscal and monetary policies lead to a restoration of American industrial might. The ongoing weak economic recovery, which entered its fifth year in June (2013), didn’t have to be this way.
Greg Kaza is executive director of the Arkansas Policy Foundation, a Little Rock think tank established in 1995.