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Economic Depressions: Their Cause and Cure
Murray Rothbard was the master of reducing complicated theories to their very essence while retaining theoretical rigor, and Economic Depressions: Their Cause and Cure is a case in point. It is thrilling how Rothbard is able to present the theory of business cycles in such an easy-to-digest format.
Written in 1969, now, more than 40 years later, its explanatory power and its relevance have not diminished in the least. This speaks to an aspect of the Austrian theory that other theories simply can't boast. It is a real theory that applies across time and place; its persuasiveness is not contingent on the particulars of any individual boom-bust cycle.
You will not only learn from Rothbard in this book; it is also the perfect item to pass on to others who are wondering how we ended up in the present economic crisis — and how we are ever going to get true, lasting relief.
To search for Mises Institute titles, enter a keyword and LvMI (short for Ludwig von Mises Institute); e.g., Depression LvMI
Written in 1969, now, more than 40 years later, its explanatory power and its relevance have not diminished in the least. This speaks to an aspect of the Austrian theory that other theories simply can't boast. It is a real theory that applies across time and place; its persuasiveness is not contingent on the particulars of any individual boom-bust cycle.
You will not only learn from Rothbard in this book; it is also the perfect item to pass on to others who are wondering how we ended up in the present economic crisis — and how we are ever going to get true, lasting relief.
To search for Mises Institute titles, enter a keyword and LvMI (short for Ludwig von Mises Institute); e.g., Depression LvMI
52 pages, Kindle Edition
First published January 1, 1969
12 people are currently reading
567 people want to read
About the author
Murray N. Rothbard
282 books1,114 followersMurray Newton Rothbard was an influential American historian, natural law theorist and economist of the Austrian School who helped define modern libertarianism. Rothbard took the Austrian School's emphasis on spontaneous order and condemnation of central planning to an individualist anarchist conclusion, which he termed "anarcho-capitalism".
In the 1970s, he assisted Charles Koch and Ed Crane to found the Cato Institute as libertarian think tank.
In the 1970s, he assisted Charles Koch and Ed Crane to found the Cato Institute as libertarian think tank.
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Displaying 1 - 13 of 13 reviews
February 29, 2012
Rothbard does it again with this excellent yet short book. He sums up the REAL reason why we have business cycles. After being told over and over again since 1936 that animal spirits and insufficient aggregate demand are the cause of the downturns, a cogent explanation of the business cycle that originated with Ricardo and refined by Mises and Hayek is put in laymens terms. Why the sudden cluster of errors by all these smart and successful entrepreneurs? Why do capital goods fall in price/demand much more than consumer goods? If supply and demand always move the economy towards equilibrium, how does the economy become so distorted so quickly? Rothbard shows us the answer to these 3 questions which lie in the Austrian theory and not the Keynesian theory. People are waking up to the Keynesian mirage that is neither a free lunch nor logical.
September 30, 2013
I have neither the competence nor the intent to evaluate theories proposed in this book. But there is the little wishful thought to synthesize their logical components and understand them with my own words.
The following is the synthesis of the book:
Part I - Attack the Keynesians
Rothbard criticized the view of Keynesians towards business cycle is simplicit and even naivete:
1) If there is inflation, then it must be caused by excessive spending of private consumers. To reduce public spending, government must step in and increase tax to force people to spend less.
2) If there is a recession, then it must be caused by insufficient spending. To increase overall spending, government must, again, step in and increase government spending.
He then raised the underlying questions: What causes periodic depressions, the booms and the busts? Is the prevailing view that business cycle is rooted in free market economy true?
In route to answering the questions, he first mention KM's theory from which the current fashionable attitude derived. KM discovered that there was not business cycle before industrial evolution in late 18th century. So KM concluded that business cycle was an inherent feature of the capitalist market economy.
But KM's view is wrong, according to Rothbard, for three reasons:
1) There is nothing in general and comprehensive theory of the market system that would explain business cycles. But current academics tend to use separated and mutually exclusive compartments of theories to account for business cycle.
2) No current theory can explain the epidemic breakdown of the entrepreneurial function at times of economic crisis.
Due to natural selection process of business, those who survived and succeeded businesses must be good forecasters of future prospects. But at times of crisis, almost all of them failed to predict the upcoming crisis, why is that?
3) During depressions, capital goods industries were always hit first and hardest, and current Keynesians theory failed to explain. If the culprit is lack of private spending, then why consumer-serving industries are the last and the least to fall in any depressions?
Part II - Introducing Ricardian Theory
Then, Rothbard started to introduce the correct view by first mentioning Ricardian theory.
The significance of R theory is the incorporation of banking and credit supply into consideration. I summarized its basic theory into the following credit-economy interaction steps. And please note that Ricardian theory is based on the assumption of gold standard and non-existence of a central bank.
1) Bank expand credit by supplying gold deposits to the market of Country X
2) Income and expenditures of country X rise, which then increase prices of goods in Country X
3) The result is inflation and economic boom in X
4) Rise in expenditure and prices of goods cause the net import to X increase, and thus deficit of balance occurs
5) Currency of X, the gold deposit, start to flow out of X into other countries. But foreign exporters do not want gold deposit from X, and instead they want gold itself.
6) So, exporters start to redeem gold from those issuing banks. Such redemption cause a dwindling gold base in X's banks.
7) There will be a point when banks in X start to frighten, since gold base is decreasing while deposits continue to be generated.
8) Then, banks in X will stop credit expansion. Such credit contraction will effect mostly domestic borrowers and thus caused economic downturn.
9) However, the process will re-balance the economic conditions. Fall in credit supply will lead to a general fall in the supply of bank deposits, or money, which will then lead to a fall of prices in X.
10) Fall of prices in X will make X's goods more competitive in international markets. Thus exports will exceed imports, and gold will flow into country X.
11) Money supply will then contract on top of an expanding gold base, and the condition of the banks becomes much sounder.
From this, we can see that banks are the integral part of business cycle in this theory. But, in a free banking market where a central bank does not exist, banks won't cause severe depression. If banks are truly competitive, any expansion of credit by one bank will pile up debt of that bank in its competitors' balances. Its competitors can attack that bank by calling upon that bank for redemption of gold. Essentially, its competitors will do the exactly the same thing as foreign exports, but they would do it immediately so that any inflation will be ceased before accumulation.
Banks can only expand uncontrolled credit for any length of time, when a central bank exists, enjoying a monopoly granted by the government. Central banking works as a banking cartel to expand banks' liabilities in the form of central bank notes rather than gold.
Thus, Ricardian theory concluded that business cycle is caused by systematic intervention by government in the market process.
Part III - Mises Theory
Section I
Rothbard thought that a breakthrough of Mises theory is the discovery of the association between interest rate and business cycle.
1) Interest rate, fundamentally, reflect public consumers' time-preference. Consumers valuing now more than future, intend to spend more and save less, and thus interest rate will rise; when consumers valuing future more than now, they tend to save more and spend less, and thus interest rate will fall. Rothbard argued that economic growth comes about largely as the result of falling rates of time-preference, aka increase of saving and lowering of interest rate.
2) But, if the fall of interest rate is not caused by consumer's lower time-preference but government's promotion of credit, what would follow?
(1) Artificially low interest rate will speed up investment in capital and producer's goods, since lower interest rate will pump up values and profitability of these investment projects.
(2) Newly injected credit in the form of investment will end up with workers in capital goods industry.
(3) However, worker's time-preference is comparatively towards presence and not low, they would spend the newly earned money on consumption instead of saving it. This means that workers redirect the spending back to the consumer goods industries, and they don't save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc.
(4) Thus, capital goods and producer's industries will suffered a decline.
=> When the new bank money filtered through the system and the consumer reestablish their old consumption/investment proportions, it became clear that there were not enough savings to buy all the producer's goods, and that business had overinvested savings in capital goods and had underinvested in consumer goods.
Section II
Rothbard argued that in Mises theory, "depression" that naturally occurred was a healthy and necessary process of liquidating unsound, uneconomic investments. And if the credit expansion or money injection by the government is an one-shot affair, boom and depression will both occur quickly and end very soon. But, in reality, expansion proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving. It is only when the bank credit expansion must finally stop that depression finally catch up with the boom. As soon as credit expansion stops, the inevitable readjustment will liquidate unsound investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.
Section III
According to Mises theory, what should a government do during a depression?
There are a few things that Rothbard discussed:
1) Quickly bring inflation to an end.
2) Never rescue unsound business, such as bailing out or lend money to business firms in trouble (draw some inference from 2008 credit crisis, LOL)
3) Do not try to inflate again. Inflating the economy again via either encouragement of private consumption or governmental expenditure will sow greater trouble later on.
4) What government needs is more saving rather than more consumption. So what should government do? Nothing, absolutely nothing.
Section IV
Lastly, Rothbard described the development of Mises theory and its relationship with Keynesian theory.
The key take-aways is the emerging "Keynesian Revolution" where Keynesians are now in general and massive retreat and money supply and bank credit theories advocated by Mises theory are being gradually acknowledged.
The following is the synthesis of the book:
Part I - Attack the Keynesians
Rothbard criticized the view of Keynesians towards business cycle is simplicit and even naivete:
1) If there is inflation, then it must be caused by excessive spending of private consumers. To reduce public spending, government must step in and increase tax to force people to spend less.
2) If there is a recession, then it must be caused by insufficient spending. To increase overall spending, government must, again, step in and increase government spending.
He then raised the underlying questions: What causes periodic depressions, the booms and the busts? Is the prevailing view that business cycle is rooted in free market economy true?
In route to answering the questions, he first mention KM's theory from which the current fashionable attitude derived. KM discovered that there was not business cycle before industrial evolution in late 18th century. So KM concluded that business cycle was an inherent feature of the capitalist market economy.
But KM's view is wrong, according to Rothbard, for three reasons:
1) There is nothing in general and comprehensive theory of the market system that would explain business cycles. But current academics tend to use separated and mutually exclusive compartments of theories to account for business cycle.
2) No current theory can explain the epidemic breakdown of the entrepreneurial function at times of economic crisis.
Due to natural selection process of business, those who survived and succeeded businesses must be good forecasters of future prospects. But at times of crisis, almost all of them failed to predict the upcoming crisis, why is that?
3) During depressions, capital goods industries were always hit first and hardest, and current Keynesians theory failed to explain. If the culprit is lack of private spending, then why consumer-serving industries are the last and the least to fall in any depressions?
Part II - Introducing Ricardian Theory
Then, Rothbard started to introduce the correct view by first mentioning Ricardian theory.
The significance of R theory is the incorporation of banking and credit supply into consideration. I summarized its basic theory into the following credit-economy interaction steps. And please note that Ricardian theory is based on the assumption of gold standard and non-existence of a central bank.
1) Bank expand credit by supplying gold deposits to the market of Country X
2) Income and expenditures of country X rise, which then increase prices of goods in Country X
3) The result is inflation and economic boom in X
4) Rise in expenditure and prices of goods cause the net import to X increase, and thus deficit of balance occurs
5) Currency of X, the gold deposit, start to flow out of X into other countries. But foreign exporters do not want gold deposit from X, and instead they want gold itself.
6) So, exporters start to redeem gold from those issuing banks. Such redemption cause a dwindling gold base in X's banks.
7) There will be a point when banks in X start to frighten, since gold base is decreasing while deposits continue to be generated.
8) Then, banks in X will stop credit expansion. Such credit contraction will effect mostly domestic borrowers and thus caused economic downturn.
9) However, the process will re-balance the economic conditions. Fall in credit supply will lead to a general fall in the supply of bank deposits, or money, which will then lead to a fall of prices in X.
10) Fall of prices in X will make X's goods more competitive in international markets. Thus exports will exceed imports, and gold will flow into country X.
11) Money supply will then contract on top of an expanding gold base, and the condition of the banks becomes much sounder.
From this, we can see that banks are the integral part of business cycle in this theory. But, in a free banking market where a central bank does not exist, banks won't cause severe depression. If banks are truly competitive, any expansion of credit by one bank will pile up debt of that bank in its competitors' balances. Its competitors can attack that bank by calling upon that bank for redemption of gold. Essentially, its competitors will do the exactly the same thing as foreign exports, but they would do it immediately so that any inflation will be ceased before accumulation.
Banks can only expand uncontrolled credit for any length of time, when a central bank exists, enjoying a monopoly granted by the government. Central banking works as a banking cartel to expand banks' liabilities in the form of central bank notes rather than gold.
Thus, Ricardian theory concluded that business cycle is caused by systematic intervention by government in the market process.
Part III - Mises Theory
Section I
Rothbard thought that a breakthrough of Mises theory is the discovery of the association between interest rate and business cycle.
1) Interest rate, fundamentally, reflect public consumers' time-preference. Consumers valuing now more than future, intend to spend more and save less, and thus interest rate will rise; when consumers valuing future more than now, they tend to save more and spend less, and thus interest rate will fall. Rothbard argued that economic growth comes about largely as the result of falling rates of time-preference, aka increase of saving and lowering of interest rate.
2) But, if the fall of interest rate is not caused by consumer's lower time-preference but government's promotion of credit, what would follow?
(1) Artificially low interest rate will speed up investment in capital and producer's goods, since lower interest rate will pump up values and profitability of these investment projects.
(2) Newly injected credit in the form of investment will end up with workers in capital goods industry.
(3) However, worker's time-preference is comparatively towards presence and not low, they would spend the newly earned money on consumption instead of saving it. This means that workers redirect the spending back to the consumer goods industries, and they don't save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc.
(4) Thus, capital goods and producer's industries will suffered a decline.
=> When the new bank money filtered through the system and the consumer reestablish their old consumption/investment proportions, it became clear that there were not enough savings to buy all the producer's goods, and that business had overinvested savings in capital goods and had underinvested in consumer goods.
Section II
Rothbard argued that in Mises theory, "depression" that naturally occurred was a healthy and necessary process of liquidating unsound, uneconomic investments. And if the credit expansion or money injection by the government is an one-shot affair, boom and depression will both occur quickly and end very soon. But, in reality, expansion proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving. It is only when the bank credit expansion must finally stop that depression finally catch up with the boom. As soon as credit expansion stops, the inevitable readjustment will liquidate unsound investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.
Section III
According to Mises theory, what should a government do during a depression?
There are a few things that Rothbard discussed:
1) Quickly bring inflation to an end.
2) Never rescue unsound business, such as bailing out or lend money to business firms in trouble (draw some inference from 2008 credit crisis, LOL)
3) Do not try to inflate again. Inflating the economy again via either encouragement of private consumption or governmental expenditure will sow greater trouble later on.
4) What government needs is more saving rather than more consumption. So what should government do? Nothing, absolutely nothing.
Section IV
Lastly, Rothbard described the development of Mises theory and its relationship with Keynesian theory.
The key take-aways is the emerging "Keynesian Revolution" where Keynesians are now in general and massive retreat and money supply and bank credit theories advocated by Mises theory are being gradually acknowledged.
August 25, 2024
Ricardian analysis (18th century) of the business cycle, with a clear cause-and-effect structure:
Step 1: Initial Economic Condition
- Cause: The economy operates with natural money (gold and silver) on a free market.
- Effect: A stable economic environment exists, where supply and demand adjust smoothly without significant fluctuations.
Step 2: Introduction of Bank Credit
- Cause: Banks begin to issue more money (notes and deposits) than they have in gold reserves.
- Effect: The money supply expands artificially, leading to an increase in money incomes and expenditures.
Step 3: Inflationary Boom
- Cause: The expanded money supply increases domestic demand, raising prices for goods and services.
- Effect: The economy experiences an inflationary boom, with rising prices and economic activity.
Step 4: Trade Deficit and Gold Outflow
- Cause: Higher domestic prices make imports more attractive and exports less competitive.
- Effect: A trade deficit develops as imports exceed exports, leading to an outflow of gold to foreign countries.
Step 5: Diminishing Gold Reserves
- Cause: Foreign creditors demand payment in gold, not English banknotes or deposits.
- Effect: Gold reserves in English banks deplete as gold flows out of the country, making the banking system increasingly vulnerable.
Step 6: Bank Contraction
- Cause: Banks recognize the risk of insolvency due to the mismatch between their liabilities (issued money) and their dwindling gold reserves.
- Effect: Banks halt credit expansion and begin to contract their loans to preserve their remaining gold reserves.
Step 7: Economic Contraction and Bust
- Cause: The contraction of bank credit reduces the money supply, leading to lower incomes and reduced demand.
- Effect: The economy enters a downturn, with falling prices, reduced economic activity, and business failures.
Step 8: Recovery and Stabilization
- Cause: As domestic prices fall, exports become more competitive, improving the trade balance.
- Effect: Gold begins to flow back into the country, the banking system stabilizes, and the economy moves toward recovery.
Conclusion: Business Cycle Dynamics
- Cause: The cycle is driven by the expansion and contraction of bank credit, leading to alternating phases of boom (inflation) and bust (deflation).
- Effect: The economy experiences recurrent cycles of economic expansion and contraction, known as the business cycle.
__________________
Ludwig von Mises and the Austrian Business Cycle Theory (ABCT):
Step 1: Natural Interest Rate
In a free market, the interest rate reflects the true time preference of individuals—balancing savings (deferred consumption) with investment.
Step 2: Credit Expansion by Banks
Banks expand credit by creating money through loans, increasing the money supply beyond actual savings. This artificially lowers interest rates below the natural level.
Step 3: Distorted Investment Signals
The artificially low interest rates mislead entrepreneurs into believing that there are more savings available than there actually are, leading to increased borrowing and investment in long-term projects.
Step 4: Malinvestment
The economy experiences a boom as investments pour into projects that seem profitable due to the low interest rates. However, these investments are unsustainable because they do not reflect real consumer preferences and resource availability.
Step 5: Resource Constraints
Over time, the reality of limited resources and actual consumer preferences becomes apparent. The mismatch between investments and real savings leads to economic strain.
Step 6: Economic Bust
The unsustainable investments (malinvestments) begin to fail, leading to a bust. The economy contracts as these projects are liquidated, resulting in a recession or depression.Interest Rate
Step 7: Correction
During the bust, credit contracts and the interest rate rises back to its natural level. The economy eventually stabilizes as resources are reallocated to more sustainable uses.
Conclusion: Cycle Repeats
If credit expansion occurs again, the cycle of boom and bust can repeat, driven by the same distortions in interest rates and investment signals.
___________________
Notes:
- Time Preference:
Time preference refers to the degree to which individuals prefer present consumption over future consumption. If people have a high time preference, they prefer consuming goods and services now rather than later, leading them to save less and spend more. Conversely, if people have a low time preference, they are more willing to postpone consumption, leading them to save more and spend less now in exchange for future benefits.
- Aggregate Savings and Interest Rates:
When people collectively decide to save more, they are exhibiting a lower time preference. As savings increase, the supply of loanable funds in the economy rises. In a free market, the interest rate, which is the cost of borrowing money, is determined by the balance between the supply of savings and the demand for loans.
- Lower Interest Rates Due to Increased Savings:
With more savings available, banks and other financial institutions have more funds to lend. To attract borrowers, these institutions may lower interest rates. Therefore, a higher level of aggregate savings (resulting from lower time preferences) leads to lower interest rates.
- Economic Growth:
The lower interest rates, in this case, are a natural result of people choosing to save more. These lower rates encourage investment because businesses can borrow at cheaper rates to finance long-term projects. Since the investment is backed by real savings, it tends to be sustainable and contributes to genuine economic growth. This is why lower time preferences (and the resulting lower interest rates) are often associated with periods of economic growth.
- Artificially Low Interest Rates:
However, if interest rates are lowered not by an increase in genuine savings but through credit expansion (for example, by banks creating money through lending or government policies that promote easy credit), the situation is different. Here, the lower rates do not reflect actual consumer preferences or an increase in real savings. This can lead to unsustainable investments and economic instability.
- Depression:
Consumer goods prices inflate (higher wages for employees) because demand outpaces supply due to the initial neglect of this sector. As businesses recognize this misalignment, they shift resources away from ongoing capital (producer goods) projects towards consumer goods production. This reallocation is part of the broader economic correction process that often leads to a recession, as the economy adjusts from the unsustainable boom induced by artificial credit expansion.
Step 1: Initial Economic Condition
- Cause: The economy operates with natural money (gold and silver) on a free market.
- Effect: A stable economic environment exists, where supply and demand adjust smoothly without significant fluctuations.
Step 2: Introduction of Bank Credit
- Cause: Banks begin to issue more money (notes and deposits) than they have in gold reserves.
- Effect: The money supply expands artificially, leading to an increase in money incomes and expenditures.
Step 3: Inflationary Boom
- Cause: The expanded money supply increases domestic demand, raising prices for goods and services.
- Effect: The economy experiences an inflationary boom, with rising prices and economic activity.
Step 4: Trade Deficit and Gold Outflow
- Cause: Higher domestic prices make imports more attractive and exports less competitive.
- Effect: A trade deficit develops as imports exceed exports, leading to an outflow of gold to foreign countries.
Step 5: Diminishing Gold Reserves
- Cause: Foreign creditors demand payment in gold, not English banknotes or deposits.
- Effect: Gold reserves in English banks deplete as gold flows out of the country, making the banking system increasingly vulnerable.
Step 6: Bank Contraction
- Cause: Banks recognize the risk of insolvency due to the mismatch between their liabilities (issued money) and their dwindling gold reserves.
- Effect: Banks halt credit expansion and begin to contract their loans to preserve their remaining gold reserves.
Step 7: Economic Contraction and Bust
- Cause: The contraction of bank credit reduces the money supply, leading to lower incomes and reduced demand.
- Effect: The economy enters a downturn, with falling prices, reduced economic activity, and business failures.
Step 8: Recovery and Stabilization
- Cause: As domestic prices fall, exports become more competitive, improving the trade balance.
- Effect: Gold begins to flow back into the country, the banking system stabilizes, and the economy moves toward recovery.
Conclusion: Business Cycle Dynamics
- Cause: The cycle is driven by the expansion and contraction of bank credit, leading to alternating phases of boom (inflation) and bust (deflation).
- Effect: The economy experiences recurrent cycles of economic expansion and contraction, known as the business cycle.
__________________
Ludwig von Mises and the Austrian Business Cycle Theory (ABCT):
Step 1: Natural Interest Rate
In a free market, the interest rate reflects the true time preference of individuals—balancing savings (deferred consumption) with investment.
Step 2: Credit Expansion by Banks
Banks expand credit by creating money through loans, increasing the money supply beyond actual savings. This artificially lowers interest rates below the natural level.
Step 3: Distorted Investment Signals
The artificially low interest rates mislead entrepreneurs into believing that there are more savings available than there actually are, leading to increased borrowing and investment in long-term projects.
Step 4: Malinvestment
The economy experiences a boom as investments pour into projects that seem profitable due to the low interest rates. However, these investments are unsustainable because they do not reflect real consumer preferences and resource availability.
Step 5: Resource Constraints
Over time, the reality of limited resources and actual consumer preferences becomes apparent. The mismatch between investments and real savings leads to economic strain.
Step 6: Economic Bust
The unsustainable investments (malinvestments) begin to fail, leading to a bust. The economy contracts as these projects are liquidated, resulting in a recession or depression.Interest Rate
Step 7: Correction
During the bust, credit contracts and the interest rate rises back to its natural level. The economy eventually stabilizes as resources are reallocated to more sustainable uses.
Conclusion: Cycle Repeats
If credit expansion occurs again, the cycle of boom and bust can repeat, driven by the same distortions in interest rates and investment signals.
___________________
Notes:
- Time Preference:
Time preference refers to the degree to which individuals prefer present consumption over future consumption. If people have a high time preference, they prefer consuming goods and services now rather than later, leading them to save less and spend more. Conversely, if people have a low time preference, they are more willing to postpone consumption, leading them to save more and spend less now in exchange for future benefits.
- Aggregate Savings and Interest Rates:
When people collectively decide to save more, they are exhibiting a lower time preference. As savings increase, the supply of loanable funds in the economy rises. In a free market, the interest rate, which is the cost of borrowing money, is determined by the balance between the supply of savings and the demand for loans.
- Lower Interest Rates Due to Increased Savings:
With more savings available, banks and other financial institutions have more funds to lend. To attract borrowers, these institutions may lower interest rates. Therefore, a higher level of aggregate savings (resulting from lower time preferences) leads to lower interest rates.
- Economic Growth:
The lower interest rates, in this case, are a natural result of people choosing to save more. These lower rates encourage investment because businesses can borrow at cheaper rates to finance long-term projects. Since the investment is backed by real savings, it tends to be sustainable and contributes to genuine economic growth. This is why lower time preferences (and the resulting lower interest rates) are often associated with periods of economic growth.
- Artificially Low Interest Rates:
However, if interest rates are lowered not by an increase in genuine savings but through credit expansion (for example, by banks creating money through lending or government policies that promote easy credit), the situation is different. Here, the lower rates do not reflect actual consumer preferences or an increase in real savings. This can lead to unsustainable investments and economic instability.
- Depression:
Consumer goods prices inflate (higher wages for employees) because demand outpaces supply due to the initial neglect of this sector. As businesses recognize this misalignment, they shift resources away from ongoing capital (producer goods) projects towards consumer goods production. This reallocation is part of the broader economic correction process that often leads to a recession, as the economy adjusts from the unsustainable boom induced by artificial credit expansion.
August 30, 2021
"Like the related doping of a horse, the boom is kept on its way and ahead of its invetibale comeuppance, by repeated dosis of the stimulant of bank credit."
Decent summation of Austrian theory of (depr/rec)-essions. Following Mises, Rothbard argues that inflationary bank credit influenced by the government is the cause of depressions. The only remedy is a laissez faire economy with a government that leaves off. Rothbard also argues against Keynes' theory of depressions, by arguing that it assumes businessmen cannot predict the sudden collapse of consumption.
Decent summation of Austrian theory of (depr/rec)-essions. Following Mises, Rothbard argues that inflationary bank credit influenced by the government is the cause of depressions. The only remedy is a laissez faire economy with a government that leaves off. Rothbard also argues against Keynes' theory of depressions, by arguing that it assumes businessmen cannot predict the sudden collapse of consumption.
July 18, 2020
It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the depression gained great headway precisely during the Great Depression of the 1930s—the very depression held up to advocates of the free market economy as the greatest single and catastrophic failure of laissez-faire capitalism.
It was no such thing. 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and by the Federal Reserve System in the United States. The failure to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government.
--the genuine gold standard is very similar to the Friedman monetary theory except pegged to market gold and not a single currency. That is the crux of the argument here. Later on, Rothbard argues for 100% gold backed currency -- that is tough because as von Mises himself noted, there is no political will.
It was no such thing. 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and by the Federal Reserve System in the United States. The failure to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government.
--the genuine gold standard is very similar to the Friedman monetary theory except pegged to market gold and not a single currency. That is the crux of the argument here. Later on, Rothbard argues for 100% gold backed currency -- that is tough because as von Mises himself noted, there is no political will.
Read
November 21, 2025interesting proposal of fault adjudication for depressions (recessions) towards banking (specially central) and government intervention, which creates a mirage of conditions that prevent consumers and industries from acting as they would in a laizes faire market.
don't know how much I agree with this idea, although refusal of corporate bailouts on any reasoning sounds good to me.
would like to read a more recent rebuttal of this idea, with time for foresight and alternative ideas.
I should read more from Mises, since he's the progenitor of this line of thought.
don't know how much I agree with this idea, although refusal of corporate bailouts on any reasoning sounds good to me.
would like to read a more recent rebuttal of this idea, with time for foresight and alternative ideas.
I should read more from Mises, since he's the progenitor of this line of thought.
November 16, 2023
I read this one a couple of months back. At the time it seemed like a great book. Explanations were clear and logically sound. But in retrospect I cant recall a single idea from the book. Considering my very selective amnesia when it comes to economics, there is probably nothing wrong with the book.
October 5, 2020
There is no economist I rely more on economic history than Murray N. Rothbard. This book talks precisely and succinctly about the causes of economic depression and cites several depressions that occurred throughout US history to show us about the Austrian Business Cycle Theories.
December 9, 2020
A short little essay on the austrian theory of the business cycle. Not as comprehensive as the first part of his America's Great Depression but it is not as demanding either and a fair introductory text at any rate.
December 29, 2019
A simple, logical theory of market cycles.
January 20, 2012
Rothbard challenges the notion that the government has to play any role in market regulation. His solution? A hands-off approach. If we let the market regulate itself, then it will eventually return to its "natural state". This happens by a "necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes the proportions between consumption and investment that are truly desired by the consumers." Sounds like some kind of economic utopia where markets are free roaming animals that need to be returned to nature. Thing is, in this "sloughing off" Rothbard neglects to tell us what happens to the mass population. Fend for themselves? Starve? They'll figure it out. Fuck this guy.
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August 3, 2011Wow, quick, easy and to the point. Government interference in free markets, i.e. central banks, are what cause depressions. Currently, the Obama administration, has a plan to broaden the regulatory powers of the Federal Reserve. Bad idea, thier monetary policy is what caused this latest meltdown.
August 23, 2014
Short but great. introduced me to a lot of banking and credit concepts.
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