The Austrian Business Cycle Theory and the Bear Market
Photo Credit: Markus Winkler
We must call the boom retrogression and the depression progress (Ludwig von Mises, Human Action, 1998, p. 575).
After two weeks, I still struggle to write my first article about blockchain. As I shared last time, the first book I picked up is a pro-regulation text and so I discontinued reading it. In the second book by Daniel Drescher, Blockchain Basics: A Non-Technical Introduction in 25 Steps, out of 250 pages, I just managed to read up to page 38. Despite reaching the fourth chapter, still I could not find the motivation and the central idea of what to write about.
Checking my ListNerds account earlier, I am supposed to send an email today. And so instead of skipping this chance, I decided to write instead about the *Austrian Business Cycle Theory (ABCT). At least, I have written several articles in the past about this topic that I could use as my reference. You can find the ideas about this topic in Chapter 20, Section 9 of Human Action. There you will see that Ludwig von Mises describes the impact of the business cycle on the market.
Summary of ABCT and Its Impact on the Market
Mises identified the “boom” aspect of the business cycle as “delusive prosperity” for it is an economic illusion not based on real data. It is an artificial wealth and no corresponding increase in production is taking place with the increase in the money supply. For Mises, such an artificial boom is already doomed from the very start.
On the other hand, the “bust” side of the business cycle is dreaded by politicians, bankers, economists, and the public. However, for Mises, economic depression is the way of the free market to restore health back into the economy. It is an act of economic recovery. It is in this context that Mises asserts that “we must call the boom retrogression and the depression progress” (p. 575).
The business cycle has several serious impacts on the market. In the eyes of Mises, the business boom is a waste of economic resources through bad investments and decreases the number of goods through overconsumption. Its inescapable outcome is impoverishment.
More seriously, the material impoverishment that follows after economic prosperity is a little consequence in comparison to the mental and psychological damages resulting from economic depression. During the economic depression, people would turn despondent, dispirited, and frustrated. People would lose their “self-confidence and the spirit of enterprise to such an extent that they even fail to take advantage of good opportunities” (p. 578). “The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration” (p. 576).
ABCT and Mainstream Economists
During the bust cycle, the news is filled with messages about the recession and the bear market. It happened in the 1930s, during the dot-com bubble, and during the housing market crash in 2008.
One good thing that came out of the 2008 market crash is that the business cycle theory from the Austrian school gained the attention of mainstream economists. Jerry H. Tempelman discussed such change in sentiment in his 2010 paper, *Austrian Business Cycle Theory and the Global Financial Crisis: Confessions of a Mainstream Economist.
Surprisingly, Tempelmen identified both Milton Friedman and Allan Greenspan as top economists who opposed ABCT. Due to the influence of the latter, the voice of William R. White, an economist influenced by the Austrian ideas was taken for granted for a while. But after his forecast happened, responses toward him changed.
Nevertheless, despite the accuracy of the theory, many of its proposals are still considered too radical. However, such rejection does not prevent its influence on many mainstream economists, which one way or another are now presenting different versions of ABCT. Among them are William Dudley and Paul Krugman, and other mainstream economists whose economic research is classified as cutting edge.
Though the influence is minimal, I appreciate the fact that ABCT is making an impact among mainstream economists. I hope that such initial influence would grow and lead to an abandonment of the economic framework that creates artificial wealth. I also wish to see the spread of economic ideas based on personal liberty, private property, and honest money. I believe that both blockchain and cryptocurrency have their rightful places in such a new economic framework. If this will be realized, this would mean a better future for the global economy characterized by greater freedom, peace, and increasing prosperity.
