“Elastic Expectations” and the Austrian Theory of the Trade Cycle

Ludwig von Mises (1943)

This short theoretical intervention responds to L. M. Lachmann’s argument that the Austrian account of the credit cycle presupposes entrepreneurs willing to interpret easier credit as evidence of lasting economic change. Mises accepts the substance of that qualification but denies that it exposes an overlooked assumption. His central claim is that credit expansion distorts investment calculations, while its capacity to generate a boom depends on how entrepreneurs understand and respond to monetary conditions.

Mises first narrows the disagreement: he rejects “elastic” as a misleading mechanical metaphor and proposes replacing Lachmann’s “crisis” with “boom.” The correction locates the expectations assumption at the point where expansion induces investment. Recalling his discussion in Nationaloekonomie, he argues that knowledge of cycle theory might itself alter business conduct:

It may be that business men will in future react to credit expansion in another manner than they did in the past.

Entrepreneurs might refrain from expanding with borrowed funds if they anticipate the boom’s eventual collapse. Mises treats this as a possibility, not an established historical change. The theory therefore allows economic understanding to modify the behavior through which its causal mechanism operates.

The article then explains why recognizing credit expansion remains difficult. From an individual business perspective, rising demand, increasing prices, and abundant credit appear to justify expansion. Public claims that technical improvements have secured lasting prosperity reinforce that judgment. Nor does comparison with familiar interest rates reliably reveal monetary ease: rates may appear normal or high while remaining below the level needed to compensate lenders for ongoing monetary depreciation.

The economic consequences of credit expansion are due to the fact that it distorts one of the items of the speculator's and investor's calculation, namely, interest rates.

This is the essay’s core conceptual move. Entrepreneurial error is not presented simply as irrational optimism; it arises from calculations made with a distorted market signal. Correctly interpreting that signal requires understanding the relation between monetary depreciation and gross interest rates, together with scrutiny of current credit conditions.

He who does not see through this, falls victim to an illusion; his plans turn out wrong because they were based on falsified data.

Mises next turns Lachmann’s emphasis on expectations against the acceleration theory, which he criticizes for treating entrepreneurs as automatic responders to increased demand. Yet he ranks this behavioral objection below a resource-and-price argument: without credit expansion, rising prices of the relevant factors of production would soon restrain additional investment. Expectations matter, but they do not displace the monetary explanation.

The closing passage repositions the theory historically:

But why forget that this theory is a continuation, perfection and generalisation of the Currency theory?

By stressing the Currency School lineage acknowledged by Wicksell, Hayek, and himself, Mises presents the “Austrian” theory as a development of an older monetary tradition. The article’s significance lies in its compact clarification of the relationship between credit conditions and entrepreneurial interpretation: monetary expansion supplies misleading calculative data, but a boom depends on actors taking those data as grounds for expansion.