Why Are Austrians Unusually Bearish?

Long Term, U.S. GDP Looks Dynamic and Progressive


“Can capitalism survive? No. I do not think it can. . . .Can socialism work? Of course it can.”
—Joseph A. Schumpeter[1]

When the financial markets went into a tailspin in late October 1997, my doomsday colleagues appeared gleeful. “The bear [market] has begun,” predicted Gary North. “It isn’t going to end for about 10 years. If things go well.” Adrian Day told me that the market was 70 percent overvalued and was delighted to see some air come out of the “bubble.” Doug Casey had been forecasting the “Greater Depression” for over a decade. “It could be worse than even I imagine.”

Over the years, I’ve been collecting books written by the perma-bears and the number is so high that I may need another shelf. Samples of bestsellers: Howard Ruff, How to Prosper During the Coming Bad Years (1979); Doug Casey, Crisis Investing: Your Profits and Opportunities in the Coming Great Depression (1979); Jerome Smith, The Coming Currency Collapse (1980); Dr. Ravi Batra, The Depression of 1990 (1987); James Dale Davidson and Lord William Rees-Mogg, The Great Reckoning: How the World Will Change in the Depression of the 1990s (1991); Harry Figgie, Jr., Bankruptcy 1995: The Coming Collapse of America and How to Stop It (1992); and Robert Prechter, Jr., At the Crest of the Tidal Wave: A Forecast for the Great Bear Market (1995). Harry Browne has written a series of negative titles: You Can Profit from a Monetary Crisis (1974), Why the Best-Laid Investment Plans Usually Go Wrong (1987), and The Economic Time Bomb (1989).

Of course, few of the doomsdayers’ dire omens have come true so far, yet their resolve in forecasting new crises is only strengthened.

The Root of Pessimism

What is at the root of this deep-seated pessimism about the global economy? Part of it may be Christian theology, an apocalyptic vision of the future (Matthew 24). But since many of the doomsdayers are not Christians, an alternative source may be the “Austrian” school of economics, some of whose leading figures feared for the future and whose theories suggest financial and monetary trouble down the road.

Joseph Schumpeter, the enfant terrible of the Austrian school, was deeply depressed about the prospects for capitalism and entrepreneurship. He thought big business would destroy individuality and initiative, and socialist central planning would engulf the world.

Many Austrian economists experienced the ravages of war and inflation in the first half of the twentieth century and were pessimistic about the future. Felix Somary, an economist who became a Swiss banker, forecast the 1929 crash, the Great Depression, and World War II, turned decidedly bearish in the mid-1950s, predicting another great depression right before his death.[2]

Ludwig von Mises was incurably gloomy about the future. Peter Drucker, the management guru who grew up in Vienna and had contact with Mises at New York University, expressed dismay about Mises. “He was the most depressing person I ever met,” he told me. Mises’s despair is clearly noticeable in his searing intellectual memoir, Notes and Recollections.[3] Mises was downhearted about many things—the world wars, the rise of socialism and Keynesianism, and his failure to receive a full-time teaching position at a major university.

Lack of Faith in Fiat Money

But pessimism about the future goes beyond world events and personal tragedy. It is also inherent in the theory of Austrian economics—especially with regard to the world monetary system and the theory of business cycles.

Austrians are deeply suspicious of the current fiat money system, which they regard as unstable and prone to crisis. Today’s monetary system of unbacked, inflated currencies is at sea without a rudder. Floating (or sinking) exchange rates may postpone, but cannot escape, the day of reckoning. Someday, a monetary, economic, or financial crisis will arise that will cause a run on the dollar, a collapse of the fractional-reserve banking system, and the re-establishment of gold and silver as real money.[4] Not surprisingly, sound-money advocates recommend the accumulation of precious metals as a hedge against such an impending crisis.

The Austrian theory of the business cycle, as developed by Mises and Friedrich A. Hayek, also suggests inherent instability in the financial and economic worlds. An increase in the fiat money supply will not simply raise prices, but will create an imbalance in the structure of the economy, a boom-bust cycle. The economic and financial boom cannot last, but will cause prices and interest rates to rise, which eventually will cause a recession and a collapse in stocks, real estate, and other assets. As Murray Rothbard puts it, “The boom requires a bust.”[5]

Recently this Austrian perspective was taken by a well-known bear on Wall Street. James Grant, editor of Grant’s Interest Rate Observer, editorialized in the October 29, 1997, New York Times that “all bull markets are eventually self-limiting” due to inevitable overinvestment. He noted that global bull markets eventually have to crash because of “superabundant” capital investment in the United States and Asia.

The Missing Link

Sometimes I feel like a lone bull among Austrian economists and financial analysts. Why am I optimistic about the global economy and stock prices? While the Austrian bears make a valid point about the inevitable dangers of monetary inflation and a fiat money system, they overlook another key element: free markets lead to long-term economic growth, rising standards of living, and hence bull markets. I raised this issue in the August 1997 issue of The Freeman, comparing two graphs of GDP growth over the past century. We can either focus on the short-term fluctuations in GDP, or the long-term trend. Short term, the economy looks volatile and dangerous. Long term, it looks dynamic and progressive.

The stock market can be viewed in the same light. We can constantly focus on the short term and play on the fears of a bear market, or we can take a long-term view. During the twentieth century, bull markets have lasted a lot longer than bear markets, and almost 70 percent of the time stocks were in a bullish mode. Why? Because in spite of wars, recessions, taxes, regulations, and inflation, the U.S. economy has remained largely favorable toward free enterprise.

Yes, crashes and bear markets are inevitable in today’s inflationary world, but so are bull markets in today’s free-market economy.


  1. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Harper & Row, 1942, 1947), pp. 61, 67.
  2. Felix Somary, The Raven of Zurich (St. Martin’s Press, 1986), pp. 293–302.
  3. Ludwig von Mises, Notes and Recollections (Libertarian Press, 1978).
  4. The best summary of this “Austrian” position is Murray N. Rothbard, What Has Government Done to Our Money? (Mises Institute, 1990).
  5. Murray N. Rothbard, America’s Great Depression, 4th ed. (Richardson & Snyder, 1983), p. 20. An excellent related booklet is The Austrian Theory of the Trade Cycle and Other Essays, ed. by Richard Ebeling with an introduction by Roger Garrison (The Ludwig von Mises Institute, 1996 [1983]).


January 1998

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