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Friday, January 13, 2012

Busts Are Not Punishments for Booms


As a follow-up to today’s TGIF about Matthew Yglesias’s critique of Austrian economics, I note that he claims that for Austrians “the suffering of a bust is a kind of cosmic payback for the boom.” Paul Krugman has similarly charged that Austrians see the bust in moralistic terms, as though it were just punishment for the boom’s bacchanalia.

Yglesias and Krugman are both wrong. Austrian writing about the bust is not intended to be a moralistic lesson about accepting one’s penalty for wrongdoing. That would imply there is a way to avoid the pain of the bust, but that since people committed the sin of living it up during the boom, they do not deserve to avoid the pain.

That, however, is not the Austrian argument, which is an economic, not a moral, argument. In the Austrian view, there is no way to avoid the bust. Artificially low interest rates misshaped the structure of production. The bust occurs when that becomes apparent to everyone and resources have to be adapted (if possible) to real conditions. Perhaps the bust can be postponed with new stimulus (further misshaping the structure of production), but it cannot be prevented.

Taking the pain of the bust sooner rather than later is a strategy for minimizing and getting past the inevitable consequences of the boom. It has nothing to do with accepting one’s just deserts.


  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.