When the recent global financial crisis hit, few people, even amongst economists, saw it coming — except among Austrian economists, many of whom for years warned of the impending burst of the housing bubble. This didn’t happen only in recent years. Henry Hazlitt saw inflation affecting the housing market as far back as at least 1946 in his classic, Economics in One Lesson, and again in a July 24, 1950, Newsweek article titled “The Inflation in Housing.”
So was Hazlitt some sort of oracle? Of course he wasn’t. The explanation should be far more obvious than it is. Austrian economics provides a theory that correlates to reality quite well. When the government turns those darn printing presses on and expands the money supply, that new money must enter the economy somehow. And where it does enter the economy, entrepreneurs see an expansion of loanable funds and are able to start new long-term investment projects. The problem, however, is that these projects do not actually reflect demand, and so resources are being allocated to the wrong place. Once this is figured out, the bust occurs as the market scrambles to reallocate the resources to where consumers most want them, which takes time. Government creates the problem in other ways, such as passing laws forcing banks to loan to individuals with weak or bad credit histories.
So rather than Hazlitt and other Austrians divination, the sad reality is the government policy is predictable. Armed with Austrian economics, Hazlitt understood this well.
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