The Socialist Myth of Economic Bubbles

By Iakovos Alhadeff

There is a wide spread belief that asset bubbles, like housing bubbles, are the result of the free market. Socialists claim that excessive risk taking on behalf of the banks, together with a lack of regulation, or even a wave of deregulation, caused the crisis of 2008.

However this is simply socialist propaganda and it does not even have the slightest element of truth. Asset bubbles arise when the peoples’ savings are misallocated, and the reason they are misallocated is always government intervention. This essay follows the tradition of the great Austrian economists, and demonstrates in a not technical way, how government intervention leads to savings misallocation, which in turn leads to asset bubbles.

And depressions are simply the aftermath of the bubbles’ collapse. The basics of the crises’ mechanics are always the same. There are no major differences between 2008 and 1929 as this document clearly shows. This is a very simple document that does not require any prior economic knowledge on behalf of the reader. A genuine interest on the subject will suffice.

• Language: English
• Publisher: Iakovos Alhadeff
• Release date: Jun 21, 2014
• ISBN: 9781310460852

Iakovos Alhadeff

I have studied economics to postgraduate level. I never worked as an economist though. I worked in the field of charter accountancyand I completed the relevant professional exams (the Greek equivalent of the English A.C.A.). My essays are written for the general reader with no economic or accounting knowledge, and the emphasis is on intuition. All my documents are extremely pro market and quite anti-socialist in nature. I admire economists from the Chicago and the Austrian School i.e. Milton Friedman, Ludwig von Mises, Friedrich Hayek, Henry Hazlitt, Murray Rothbard. I am Greek and English is not my first language, so I hope you will excuse potential errors in my syntax.

Book preview

The Socialist Myth

of Economic Bubbles

Iakovos Alhadeff

Smashwords Edition

Copyright (c) 2014 by Iakovos Alhadeff

TABLE OF CONTENTS

Introduction

A Bubble in a Simple Barter Economy

Savings

Taxation, Debt and Inflation as Means of Financing Government Deficits

A Primitive Example of Government Induced Bubbles

Introducing Paper Money

Interest Rates, Real Savings and Paper Savings

Is It Moral for a Government to Use the Economy’s Savings?

Trade Deficits

USA and China

The Eurozone Crisis

The American Great Depression of 1929

The Dutch Tulip mania of the 1634

Greece

Free-Market versus Government Induced Bubbles

Under Consumption Theory

Over Production Crises

Psychological-Speculative Crises

The Socialist Myth of the Greedy Banker

References

Introduction

In my essay The Causes of the Economic Crisis for non Economists, I explained why the American crisis was caused by government intervention and not by the free market. Since the housing bubble was one of the main elements of this crisis, I discussed the issue of the American housing bubble too. In this essay I want to examine asset bubbles on their own, and not as part of the American crisis or any other crisis. I will use various examples, but the emphasis will be on asset bubbles themselves and not on a particular crisis. More specifically the emphasis will be on the forces that lead to their formation and collapse. I will focus on housing bubbles, since they are very common, and also a kind of bubble we have all gathered a lot of experience about.

I want to begin with a bubble in a simple barter economy, which will actually say almost everything that can be said about bubbles, because I believe asset bubbles are a much simpler phenomenon than they seem to be. The aim of this essay is to explain why bubbles are always the result of government policies and not of the free market. I believe it is better to read my essay The Socialist Myth of the Greedy Banker before reading this one. Because most people think that it is private banks that create money and crises, and in the aforementioned essay I explain why this is not so, which is the first step to understand bubbles. But the two essays are independent documents.

A Bubble in a

Simple Barter Economy

Assume an economy with two individuals and many goods. The good used as money in the economy is oranges. And I happen to produce oranges. Everyday I produce 10 oranges and I consume 5 of them. I put the 5 oranges that I save in a box called bank. This box keeps track of the number of oranges I place in it everyday, and issues a receipt. This box is a mechanism that finds someone to lend my oranges and who is willing to pay a higher interest rate than the one the bank has to pay me. I do not know how my savings/oranges will be used. I simply have a deposit account which keeps track of the oranges I put in the box/bank.

Let’s assume that this mechanism/box/bank agrees with the other individual in the economy to lend him my oranges. The other person somehow decides that the most profitable way to use my oranges is to convert them to houses i.e. eat them in order to sustain himself and build houses. I assume for simplicity that he is using whatever materials he finds around to build the houses i.e. he does not have to buy and sell construction materials.

At some point the houses are ready. So I have deposited let’s say 1.000 oranges in the box/bank, the builder has eaten the oranges, and has built the houses. But now he has to repay his loan i.e. the 1.000 oranges. But in order to do so he needs to sell some of the houses. If I am willing to buy a part of the houses for 1.000 oranges, I will transfer him the credits in my deposit account, and everything will be fine. There is an intermediary of course i.e. the box/bank, but it is the two of us who are the important players. If I agree to buy at the price he is selling, and which is the price that covers