Wednesday, December 10, 2014

How The Price Mechanism Can End Recessions If We Let It Work

Jim Grant has been getting a lot publicity about his analysis of the 1921 recession in the US.  Grant argues that the price mechanism was allowed to operate and it ended the recession.  Unemployment benefits were not available in 1921 so the unemployed were forced to take the wages that were on offer.  Lower wages allowed producers to cut prices and get rid of unsold inventory without taking loses.  The economy recovered, according to Grant because the price system was flexible and it was allowed to provide the proper signals to workers and producers.  Grant argues that we should have learned a lesson from the 1921 recession.  Instead, we prevented the price mechanism from operating and we have had an extended recovery. This is market fundamentalism in its strongest version.  It must make a lot of people happy to learn that adherence to the law of supply and demand would have led to a rapid recovery from the financial crisis. 

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