Ludwig von Mises · 1933
This file is a brief, single-author theoretical-policy essay: Mises’s 1933 Festschrift contribution, here in English translation, on the state and near future of business-cycle research. It is a compact Austrian intervention in Depression-era debates over pump-priming, reflation, labor policy, and deflation. Its main thesis is paradoxical: the cause of cyclical crises has largely been identified, yet policy remains drawn toward the credit expansion that produces boom and bust.
Economic theory cannot answer this question—it is not a theoretical problem.
The opening section asks why better theory has not yielded better policy. Mises argues that the circulation-credit theory has become the unavoidable framework even for its opponents. Advocates of renewed monetary expansion concede its logic when they promise only a limited, carefully dosed credit creation. The real dispute is therefore not whether credit expansion moves the cycle, but whether its dangerous mechanism can be safely used.
The Circulation Credit (Monetary) Theory of the Trade Cycle must be considered the currently prevailing doctrine of cyclical change.
Sections II and III explain why policy resists this conclusion. Public opinion favors low rates and treats cheap credit as the natural remedy for stagnation; politicians can attach this program to whichever price complaint is current, whether rising living costs or falling producer prices. Mises reduces the recurring policy temptation to a single formula:
The credit expansion which evokes the upswing always originates from the idea that business stagnation must be overcome by "easy money."
He then adds wage and price rigidity to the diagnosis of the depression. Falling prices, for Mises, need not by themselves cause lasting mass unemployment; the problem is that union wage policy and price supports keep key money costs from adjusting downward. Inflationary schemes gain support because they seem to restore profitability by raising selling prices while avoiding an open attack on organized labor.
In spite of all contradictory political interventions, it is also admitted that the continuing mass unemployment is a necessary consequence of the attempts to maintain wage rates above those that would prevail on the unhampered market.
Section IV turns from slogans to entrepreneurial calculation. Artificially low rates produce a boom only when entrepreneurs expect them to persist and therefore treat them as valid signals for longer production plans. If authorities credibly announce that expansion will soon stop, the stimulus defeats itself: projects dependent on temporary cheap credit will not be begun.
If the entrepreneurs expect low interest rates to continue, they will use the low interest rates as a basis for their computations.
This is the essay’s core Austrian move. Credit expansion falsifies intertemporal calculation: investments appear profitable under bank-made rates that would not appear profitable under unhampered loan-market rates. Once additional credit ceases, the plans built on those rates must be revised.
Economists have long known that every expansion of credit must someday come to an end and that, when the creation of additional credit stops, this stoppage must cause a sudden change in business conditions.
The final section links Mises to the Currency School while marking the unfinished task of research. He thinks modern cycle theory has added less to practical policy than is often claimed, because the older Currency School already grasped the connection between credit expansion and cyclical disturbance. Yet theory remains weak where 1930s policy most needs clarity: the analysis of generally declining prices.
Unfortunately, economic theory is weakest precisely where help is most needed—in analyzing the effects of declining prices.
For Mises, fear of deflation sustains the belief that growth, capital accumulation, and welfare require inflationary credit. The essay’s future-facing program is therefore not more activist stabilization, but a theory of falling money prices that can break the political spell of easy money.
So long as this naïve inflationist theory of development is firmly held, proposals for using credit expansion to produce a boom will continue to be successful.
The work remains relevant because it combines theoretical confidence with political pessimism. Mises presents business-cycle research as having vindicated the circulation-credit account, but he sees cheap money, wage rigidity, and fear of falling prices as powerful enough to override it. Recovery, on his view, requires not managed reflation but monetary restraint, price flexibility, and interest rates formed on an unhampered market.
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