Economists, politicians, and pundits looking for answers to the economic crisis fall into two broad categories. Keynesians and statists argue for more aggressive interventions from governments and central banks. Distrusting the free market’s self-regulating processes, they promote public spending to create jobs and low interest rates to rekindle private investment and consumer spending. Thinkers of the classical-liberal persuasion, by contrast, argue that no quick fix can bring the economy out of its doldrums; only when the rules of capitalism appear stable and predictable again will markets revive. Put another way: Keynesians and statists believe in flexible, “discretionary” economic policies; classical liberals believe in set rules.

Economic history proves the superiority of the second approach, but democracy often makes the first more attractive to politicians. After all, in a crisis, people expect their leaders to do something; refraining from action and sticking to abstract principles play poorly to public opinion. As previous recessions demonstrate, however, public pressure for action usually leads to bad decisions that prolong or intensify a crisis. The situation is analogous to what happens on the soccer field when a goalie faces a penalty kick. Statistics show that the goalie should stay in the center of the net to increase his chances of blocking the shot. Yet in most cases, he jumps to the left or right just before his opponent kicks. Why? Because the crowd urges him to act, even though doing so reduces his likelihood of success.

Since the beginning of the crisis in 2008, governments have similarly lurched from side to side, to little good effect. True, some basic market-supporting rules—those that back free trade and oppose inflation, monopoly, and the nationalization of industry—have been maintained since 2008. This stability compares favorably with government responses to the Great Depression in the 1930s, which made things worse by permitting nationalization and monopolies while interrupting the free flow of goods, capital, and people. In 1974, too, wrongheaded policies magnified a crisis. After oil-producing nations formed a cartel, OPEC, and boosted oil prices dramatically, Western production costs shot up, smothering consumer spending and bringing the economy to a standstill. To reignite growth, Keynesian economists persuaded central banks to print more money than ever before. All Western governments followed this prescription, leading to an explosion of inflation. Because neither consumers nor entrepreneurs would increase their spending or investment in that climate (they rightly assumed that these were short-term, unsustainable policies), the result was disastrous stagflation—economic stagnation and inflation combined.

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