There Are Two Types of Credit — One of Them Leads to Booms and Busts

by | Nov 15, 2016

There Are Two Types of Credit — One of Them Leads to Booms and Busts

by | Nov 15, 2016

In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.

Businessmen themselves are confused as to why. They cannot make sense of why certain business practices that were profitable yesterday are losing money today. Bad business conditions emerge when least expected — just when all businesses are holding the view that a new age of steady and rapid progress has emerged.

In his writings, Ludwig von Mises argued against the prevailing explanation of the business cycle of over-production and under-consumption theories, and he critically addressed various theories that depended on vague notions of mass psychology and irregular shocks.

In the psychological explanation, an increase in people’s confidence regarding future business conditions gives rise to an economic boom. Conversely, a sudden fall in confidence sets in motion business stagnation.

Observing a Business Cycle vs. Explaining a Business Cycle

Now, there can be no doubt that during a recession people are less confident about the future than during good times. But to observe this is not to explain it.

Likewise, theories that view various shocks and disruptions as the central cause behind boom-bust cycles do not advance our knowledge regarding the boom-bust cycle phenomenon.

Neither explains how the boom and bust come about, or why they are of a recurrent nature.

Read Frank Shostak’s full article at the Mises Institute.

Frank Shostak

Frank Shostak's consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies.

View all posts

Our Books

Shop books published by the Libertarian Institute.

libetarian institute longsleeve shirt

Our Books

cb0cb1ef 3fcb 417d 80d8 4eef7bbd8290

Recent Articles

Recent

On Applying Rothbardian Populism

On Applying Rothbardian Populism

Just as state action is a zero-sum game, so is politics: some win and others lose. But if the term “populism” is supposed to be meaningful, populism must have some distinctive elements for it not to be confused with mere democracy. Although politics occur in different...

read more
The 1775 Two Step That Led to American Independence

The 1775 Two Step That Led to American Independence

As Americans prepare to celebrate the 249th anniversary of the Declaration of Independence, we should also toast the 250th anniversary of a savvy political two-step that paved the way to formally breaking with Britain the following year. “We, your Majesty’s faithful...

read more
“Smart War” and State Terrorism

“Smart War” and State Terrorism

On June 16, 2025, President Donald Trump threatened the 10 million inhabitants of Tehran, Iran, with death, for their government’s alleged nuclear aspirations: Iran should have signed the “deal” I told them to sign. What a shame, and waste of human life. Simply...

read more

Pin It on Pinterest

Share This