Pollock, Alex J. Boom and Bust: Financial Cycles and Human Prosperity. Washington (DC): AEI Press, 2011.
Most people are familiar with George Santayana’s words “Those who cannot remember the past are doomed to repeat it.”[1] Fewer know the late American radio broadcaster Paul Harvey Aurandt’s saying “In times like these, it helps to recall that there have always been times like these.”[2] Together, these statements accurately sum up the premise of Alex J. Pollock’s book Boom and Bust. Namely, that the busts of financial bubbles (“unsustainable increase in the price of some asset”) are not new experiences.[3]
Since 1720, over 30 major financial crises have occurred around the globe, averaging one major crisis every decade.[4] Despite this, many people label each new crisis as unique, disregarding financial history and promising themselves it will not happen again. Pollock argues that not only will the cyclical trend of boom and bust continue, but that without this trend our nation cannot achieve long-term growth.[5]
Pollock observes that since flawed human beings make the decisions in government and the markets, those people will also make mistakes.[6] He notes that during a boom, a bubble is formed by rising asset prices, encouraging “an over-optimistic excess of borrowing.”[7] This means that loans are made at high risk to investors. The bust begins when short-term investors realize their chance of loss, subsequently retrieving their money and refusing new loans.[8] Busts are often punctuated by panics in which many people do this simultaneously. However, once asset prices cease to fall, they almost always stabilize at a level higher than that at which the boom began,[9] thus contributing to what Adam Smith termed “the natural progress of opulence.”[10]
Unfortunately, once growth resumes at a normal level and liquidity (the availability and reliability of assets and prices)[11]returns to equilibrium, investors take this restoration of normalcy for granted and the cycle repeats itself.[12] Since different nations of the world have already experienced so many cycles, Pollock infers that something within the system inherently causes them.[13] He astutely recognizes that this trend continues in large part because human nature remains the same continually.[14] This observation corroborates a biblical worldview on the nature of man.
Another reason why these cycles continue is because observing the present is much different than reviewing the past with the near-20/20 advantage of hindsight.[15] Though many would posit economics as a science, Pollock disagrees, arguing that we obviously cannot predict the tenor of markets as we can the movement of the planets. I think F. A. Hayek confirms Pollock’s argument when he writes that generally “all that we shall be able to predict will be some abstract characteristic of the pattern that will appear.”[16]
Some people encourage government intervention in the form of regulation of loans and a government agency functioning as a “systemic risk regulator,” attempting to keep investors from sustaining crippling losses.[17] Pollock appropriately discourages any type of interventionism, correctly claiming that government intervention only compounds problems, prompting more intervention.[18] If left unchecked, this cycle also continues indefinitely. Pollock is supported by Ludwig von Mises, who writes that the “universal desire for the interventionist system is matched by the rejection of all concrete measure of the interventionist policy.”[19]
Unfortunately, no perfect solution exists.[20] Yet Pollock offers several flexible responses aimed at ameliorating the boom and bust impact. These include conserving loans when asset prices rise, reducing government intervention, and maintaining an informed base of investors.[21] He also recommends a “systemic risk advisor,” rather than a regulator, essentially a think tank regarding financial history and patterns, capable of advising investors, banks, Congress, and even the White House.[22]
Pollock’s case is strong because he is supported by two prominent economists of the Austrian school. He consistently maintains an historical perspective and does not fall victim to what Hayek terms the “fatal conceit.”[23] While he fails to provide extensive evidence for few of his assertions, his purpose is to provide an introduction rather than an exposition. Ultimately, Pollock presents a convicting rationale, using sound reasoning, while adequately concealing any relevant bias.
ENDNOTES
[1] “George Santayana (1863-1952),” Matthew Caleb Flamm, Internet Encyclopedia of
Philosophy, accessed February 2018, https://www.iep.utm.edu/santayan/
[2] “Paul Harvey Quotes,” BrainyQuote, accessed February 2018, https://www.brainyquote.com/quotes/paul_harvey_100439.
[3] Alex J. Pollock, Boom and Bust (Washington [DC]: AEI Press, 2011), 3-4.
[4] Pollock, Boom and Bust, 5.
[5] Ibid., 10.
[6] Ibid., 15.
[7] Ibid., 19.
[8] Ibid., 25.
[9] Ibid., graph on 43.
[10] Ibid., 10.
[11] Ibid., 29.
[12] Ibid., 31.
[13] Ibid., 19.
[14] Ibid., 21.
[15] Ibid., 35.
[16] F. A. Hayek, “The Pretense of Knowledge,” in The Essential F. A. Hayek, ed. The Foundation for Economic Education (Atlanta: The Foundation for Economic Education, 2016), 39.
[17] Pollock, Boom and Bust, 82.
[18] Ibid., 49-52.
[19] Ludwig von Mises, A Critique of Interventionism, trans. Hans F. Stennholz (New Rochelle: Arlington House, 1977), 57.
[20] Pollock, Boom and Bust, 68.
[21] Ibid., 69-73, 76.
[22] Ibid., 85-86.
[23] F. A. Hayek, The Fatal Conceit, ed. W. W. Bartley III (Chicago: University of Chicago Press, 1991), 21.
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