I received in the mail today a copy of the 2nd edition of Jesus Huerta de Soto's Money, Bank Credit and Economic Cycles with a nice note from him pointing me to his new preface. Professor Huerta de Soto and I have known of each other for now close to 20 years, we have periodically corresponded throughout those years but unfortunately I think we have met only 1 time -- at an MPS meeting in Cannes, France. But our meeting was very memorable to me as extremely pleasant and one that I wish I had many more ocassions to experience. Professor Jesus Huerta de Soto is a gentleman's scholar in a way that is very reminiscent of Professor Kirzner. To be honest very few within the contemporary Austrian school of economics carry themselves with such class and old world dignity. I know this is one of my failings --- too crude in my sense of humor and undignified in my demeanor (I get angry easily and am vindictive, and very competitive) --- and I wish I could behave better. Professor Kirzner in my mind sets the standard.



Anyway, I do have my disagreements with certain arguments Prof. Huerta de Soto makes in his various writings, but I have great respect for his deep and uncompromising commitment to the Austrian school of economics, and the tremendous job he has done in teaching and in publishing Austrian works in Spain. He has written papers and books dealing not only with monetary economics and legal history, but also on the socialist calculation debate, entrepreneurial market process, methodology, and welfare economics. In short, he is a dynamtic teacher, writer and organizer for the Austrian school of economics first in the Spanish speaking world, but increasingly now in English language works (he recently published The Theory of Dynamic Efficiency with Routledge).

In this second edition of his treatise on money, Huerta de Soto provides a short preface contextualizing the current financial crisis in light of the Austrian theory he develops in the book. In the process of making the argument for the superior analytical framework provided by the Austrian tradition, Huerta de Soto tackles the interpretative puzzle of the relative price stability experienced under Greenspan (a fact that may in fact have misled individuals such as Jeff Hummel and David Henderson). But such a record is actually problematic, rather than a sign of the perfection of central banking practice. During this period of time, the US realized tremendous productivity increases due to technological innovations, and also new trading opportunities in China and India. As Huerta de Soto writes:

"The absence of a healthy "deflation" in the prices of consumer goods in a period of such considerable growth in productivity as that of recent years provides the main evidence that the monetary shock has seriously disturbed the economic process."

This is basically Selgin's thesis in Less Than Zero, and Huerta de Soto presents another Selgin argument when he states that:

"the theorem of the economic impossibility of socialism, which the Austrian economists Ludwig von Mises and Friedrich A. Hayek discovered, is fully applicable to central banks in general, and to the Federal Reserve and (at one time) Alan Greenspan and (currently) Ben Bernanke in particular. According to this theorem, it is impossible to organize society, in terms of economics, based on coercive commands issued by a planning agency, since such a body can never obtain the information it needs to infuse its commands with a coordinating nature. Indeed, nothing is more dangerous than to indulge in the "fatal conceit" — to use Hayek's useful expression — of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times."

Selgin develops this argument about central planning very forcefully in his A Theory of Free Banking. But I was left after reading this rather wonderful preface to wonder where the source of the critical disagreements between Huerta de Soto and Selgin, White and Horwitz really lay with regards to economic theory (legal and banking history is another question). But I think we can all agree that artificial credit expansion distorts economic activity and ultimately destroys wealth rather than create it. And we can agree that government intervention into the market economy to try to remedy the previous artificial credit induced distortion does little but to lead to further distortions. As Huerta de Soto argues:

"the most appropriate policy would be to liberalize the economy at all levels (especially in the labor market) to permit the rapid reallocation of productive factors (particularly labor) to profitable sectors. Likewise, it is essential to reduce public spending and taxes, in order to increase the available income of heavily indebted economic agents who need to repay their loans as soon as possible.

Economic agents in general and companies in particular can only rehabilitate their finances by cutting costs (especially labor costs) and paying off loans. Essential to this aim are a very flexible labor market and a much more austere public sector. These factors are fundamental if the market is to reveal as quickly as possible the real value of the investment goods produced in error and thus lay the foundation for a healthy, sustained economic recovery in a future that, for the good of all, we hope is not too distant."

I applaud Professor Jesus Huerta de Soto on the publication of the 2nd edition of his book and for all the important activities he is engaged in with his own research, his teaching at King Juan Carlos University in Madrid, and his publishing activities. And for the clarity with which he states the basic lessons of economic for public policy at this critical time in our history.