Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania and is a noted writer and lecturer for freedom.

Many business forecasters and market analysts don’t realize that they owe their jobs to government. Their profession was born with the first depression that engulfed an economy. And since depressions are the inevitable consequence of inflation and credit expansion, which are deliberate government actions, all occupations and callings that are concerned with the business cycle ultimately owe their existence to government. As a certified public accountant earns his livelihood from the complexities of onerous taxation, so does the market forecaster and business economist derive his support from government policies that generate economic booms and busts.

Businessmen want to know where they are in the cycle. In particular, they would like to know the time when a boom turns to a bust, the date of the break, length and depth of depression, the beginning of recovery, and so on. It does not matter whether they fully understand the ultimate causes of the economic dilemma. They usually know from experience that a boom created by inflation or credit expansion cannot last and must lead to a slump. This is why they often call on economists and expect of them what is beyond the ability of any man.

It is true, many economists can explain logically why the boom plants the seeds for depression. They are aware of the differences between simple inflation and credit expansion, which confuse most businessmen. But they have no special crystal ball through which they can view the future.

Simple Inflation

It does not matter whether the government treasury issues new legal tender notes directly to the people or places its obligations in the banking system which then monetizes the debt. In both cases the proceeds accrue to the government for deficit spending, which is the characteristic of simple inflation. It creates an atmosphere of prosperity and affluence. While many prices rise, business profits are good, stock market profits are excellent, and wages soar. It is true, the unfortunate victims of inflation, such as pensioners and individuals who live on fixed incomes, are forced to curtail their consumption. But most businessmen, workers, and government employees are led to increase their consumption. In fact, businessmen may even consume some capital.

In addition, the expectation of rising prices causes many people to reduce their cash holdings. They prefer to purchase goods and services now before prices rise again. And this reduction in cash holdings in turn raises goods prices even further.

Economic production promptly adjusts to the inflation pattern of spending. Industries catering to government demand and consumers’ goods prosper and expand; other industries tend to lose some capital and labor. In fact, the capital consumption by government and business, in addition to the malinvestment of capital in inflated consumers’ goods industry, creates a general shortage of capital. Interest rates soar. If the inflation is continued, interest rates will rise to astronomical levels, the purchasing power of money will fall, and the economy sinks into deterioration and depression.

If the inflation should be halted before that dreadful finale, the economy will suffer the pains of readjustment. The inflated industries will contract, evidencing the symptoms of depression, stock prices decline, and interest rates fall. When the people are finally convinced that the inflation has come to an end, they may restore their normal cash holdings, which reaction tends to raise the value of money and reduce goods prices. And business will evidence more symptoms of recession.

Economists know all this. But they cannot know when the government will halt the inflation. After all, this is an arbitrary decision by the monetary authorities moved by political consideration, pressured by the beneficiaries of inflation, and misguided by inflationary doctrines. Even the monetary authorities themselves may not know whether and when they will make the decision. Will they really stabilize the currency or merely reduce the rate of inflation? When will they resume the inflation? At what rate? And finally, no one can foresee the reaction of the people. When will they increase their cash holdings? How much?

Credit Expansion

Credit expansion differs materially from simple inflation. Newly created money enters the loan market where it lowers the interest rate. The U.S. government may balance its budget, but in order to stimulate business and promote full employment it may flood the banking system with new credits. The lower interest rates induce business to embark upon ambitious projects of expansion and modernization, which leads to a boom in such capital goods industries as steel and tool making.

It is obvious that this boom lacks the real capital that flows from savings and profits plowed back. It is based on newly created money and therefore, sooner or later, must induce the feverish chills of a maladjusted economy. The boom activity pushes up the prices of capital goods which are business costs. Also, labor costs tend to rise, which leads to greater consumption expenditures and higher consumers’ goods prices. But they usually trail behind the prices of producers’ goods, which gradually reduce the profit margins of business. When the growing maladjustment of prices and costs finally inflict business losses, the depression begins. It is a period of readjustment and correction, in accordance with the true state of consumer choices and capital markets.

Many economists understand the causal connections of boom and depression. They know the irreparable harm done by credit expansion artificially induced in the structure of economic production. But they cannot possibly know the minds of the monetary authorities who initiate the credit expansion. How long will these men continue to feed the boom with more money? When will they finally be frightened by the consequences of their policies and decide to abandon them? Will they substitute credit contraction for expansion, or merely stabilize the money supply? Will they pursue the new course with conviction or waver between the new and the old? And when will the public realize that the signals have changed? What will trigger the stock market panic which indicates that the multitudes of investors are finally recognizing the change of signals and rushing to adjust their investments to the new situation?

The Future Cannot be Calculated

There are no rules covering the political actions of man or fixing the time of his reaction. The future is uncertain, and therefore, it is impossible to calculate the future structure of the market. In fact, there are no constant relations in economics. For instance, the effects of a 10 per cent expansion of the money supply on goods prices is unpredictable. Prices may rise little or much, depending on the reaction of men to the inflation. A bumper crop of wheat that exceeds last year’s crop by 20 per cent may cause prices to fall little or greatly, depending on the variable behavior of men. If a statistician ascertains that prices actually declined 5 per cent at a certain point of time in a certain market, he merely established a historical fact, no constant measurable relationship that is valid for all times and places.

In the natural sciences, the individual factors of change can be observed and measured in isolation. But no such isolation is possible in human action. Experiences are always complex phenomena that do not provide the factual bases on which theories and predictions can be built. They cannot be made "quantitative" and be measured.

Quantitative economics, as it is practiced by central planners and would-be dictators, also disregards the market process. Its equations merely describe imaginary states of rest and equilibrium. It cannot explain why and how such states are brought about and cannot analyze actions that bring changes to the market process. The quantitative economist cannot perceive the activities of enterprising men, the entrepreneurs and speculators, who continually rearrange economic production in order to profit from price changes. In short, the economics of central planners is incapable of dynamic analysis; it is static and therefore contributes nothing to the elucidation of the market process. It miscalculates the future every time.

Entrepreneurial Judgment

The world is a scene of changes. Today is not yesterday, and tomorrow will not be today. We ourselves change. How, then, can we foretell man’s works and deeds of tomorrow? Change, indeed, is painful, yet ever needful.

Entrepreneurs as businessmen and investors speculate on economic changes. They expose their wealth and income to the changes in the market place. In anticipation of specific changes they rearrange their factors of production in order to prepare for future consumer wants. If they anticipate future changes correctly, they will earn entrepreneurial profits; if their judgments are wrong, they will suffer losses.

Genuine profits, which must be distinguished from interest on invested capital and managerial remuneration of the businessman, flow from the correct anticipation of future changes in demand and supply, resulting from changes in fashion and technology, government intervention, labor union policy, competition, and even the weather. On the search for such profits entrepreneurs must walk lonely roads, for profits can be found only where others have not prepared for changes and failed to adjust in time. When the multitude of investors arrives on the scene, the readjustment has been completed, and the opportunity for profit has disappeared. In fact, the multitude of late-corners usually overreacts and thereby creates new maladjustments which necessitate more readjustments.

Entrepreneurs do not depend on economists for reliable information about the future. They are skeptical about economists’ advice and prognostication. But they are ever mindful of the need for reliable information on all relevant data. This is why they read the financial pages of newspapers and magazines, subscribe to advisory services, employ business economists, listen to the promises of government officials and watch their actions. Nothing must escape them. But all the data gathered cannot remove the uncertainty of the future.

More than 1,500 years ago Saint Augustine offered this explanation: "God will not suffer man to have a knowledge of things to come; for if he had prescience of his prosperity, he would be careless; and if understanding of his adversity, he would be despairing and senseless."



Historical Analysis

In retrospect historical analysis tries to show us that the outcome could not have been different from what it really was. Of course, the effect is always the necessary resultant of the factors operating. But it is impossible to deduce with certainty… the future conduct of men, whether individuals or groups of individuals.

LUDWIG VON MISES, Theory and History