This is the first of a series of fortnightly posts on the new Martin Wolf Exchange. From now on comments on my columns will be appended to the columns themselves. I will continue to try to comment, when I feel moved to do so. In this forum, however, I will open the discussion of a topic that I am thinking about. My aim will be to elicit views of readers. I will give my own response to the question I have raised, before posting the next issue for discussion.

My first topic is a little arcane, but important: it is the view of the crisis given by Austrian economics.

I think we can say that conventional neo-classical equilibrium economics did a poor job in predicting the crisis and in suggesting what should be done in response. We can also say that neo-Keynesians pointed out some important precursors of the crisis, in particular, the destabilising role of huge private sector financial deficits in countries with large external deficits, such as the US, and the Keynesian view certainly played a big part in the post-crisis response, as did that of Milton Friedman.

Yet some would argue that economists working in the Austrian tradition were more nearly right than anybody else. In particular, they have argued that: inflation-targeting is inherently destabilising; that fractional reserve banking creates unmanageable credit booms; and that the resulting global “malinvestment” explains the subsequent financial crash. I have sympathy with this point of view. But Austrians also say – as their predecessors said in the 1930s – that the right response is to let everything rotten be liquidated, while continuing to balance the budget as the economy implodes. I find this unconvincing. Mass bankruptcy is extremely costly. Moreover, it is impossible to separate what is healthy from what is unhealthy during a general economic collapse triggered by an implosion of the financial system.

Anyway, what do readers think of the Austrian analysis? In particular, what does it imply about the future of the global monetary and global financial systems and about the right way to respond to financial crises when they occur?

Further update: Read Martin’s conclusions on this discussion. His next discussion will appear on Thursday.

Update: Read Martin’s first response to readers’ views and his comment on the Austrian perspective on credit cycles