The Business Cycle: A Definition

7/24/2019 The Business Cycle: A Definition

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THEBUSINESSCYCLE: ADEFINITION

TUURDEMEESTER

There can be no facts in a or!" itho#t $a!#es%

Frank van Dun

&Oh' (hat a tan)!e" eb e ea$e* hen first e +ractice to "ecei$e',

Sir Walter Scott

DRAFT-DONOTCITE: critica! re.ar/s an" s#))estions are e!co.e att##r0rothbar"%be%The i"eas +resente" in thiste1t ha$e a!rea"2 been s#b3ect to criti4#e b2 Fran/ $an D#n* 5#i"o H6!s.ann* Marian Eabras#* Micha7! Ba#ens an"8a$ier Me#!"ers* for hich I a. $er2 )ratef#!% Of co#rse* a!! errors re.ain .2 on%

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TABLEOFCONTENTS

The B#siness C2c!e: a Definition %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%9T##r De.eester%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%9

Tab!e of Contents%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%9%Intro"#ction%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%;%Metho" %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%;

Socia! +heno.ena%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%;Three a2s of sa2in) thin)s abo#t socia! +heno.ena%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%(h2 is the B#siness C2c!e a C2c!ica! ?heno.enon@ %%%%%%%%%%%%%%%%%%%%%%%%%%%%%

(hat is a C2c!e@%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%The c2c!ica!it2 of the b#siness c2c!e %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% On the c2c!ica! feat#res of fra#" %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%99


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9% INTRODUCTION

The b#siness c2c!e is a +heno.enon ith !e)en"ar2 a!!#re% It "oes its $eno.o#s or/ in"is)#ise* #nnoticeab!2 conta.inatin) entire societies* ho!e continents e$en% An" once its crisis an""e+ression stri/e* the2 see+ .erci!ess!2 thro#)h strata rich an" +oor* shatterin) "rea.s an""e.o!ishin) b#sinesses* !ea$in) in their a/e har"shi+* "isi!!#sion.ent an" "es+air% The b#siness c2c!eis the basi!is/ of o#r "a2* a .2stica! creat#re here e$er2bo"2 s+ea/s of b#t hich fe /no ho tohan"!e% As ith an2 ser+ent* e can on!2 ri" #s of it for once an" for a!!* if e #nco$er ho an"here it is hatche" an" on hat it fee"s to s#r$i$e an" re+ro"#ce% (hat fo!!os is an atte.+t to "oe1act!2 that%

A contrib#tion e !i/e to thin/ to ha$e .a"e in this te1t* is that b2 brea/in) #+ thecharacteristics of the b#siness c2c!e into three cate)ories c2c!ica!it2* +er$asi$eness* rec#rrence* an" b2

i"entif2in) a "ifferent socia! +heno.enon at the root of each of these three* e$e !ai" the)ro#n"or/ for a better )enera! #n"erstan"in) of this +heno.enon%

Another thin) that* as far as e /no* .a/es this te1t "ifferent fro. others* is that it traces theb#siness c2c!e bac/ to an #n3#st an" i..ora! act-fra#"-* an" that it shos ho so.e of the .ostessentia! characteristics of the b#siness c2c!e are a "irect conse4#ence of this act% This s#))ests that achan)e of +ers+ecti$e is +ossib!e an" necessar2 hen "ebatin) the b#siness c2c!e* a chan)e fro. the"o.ain of ca!c#!ation* efficienc2* an" +o!ic2* toar"s the "o.ain of .ora!it2* 3#stice* an" $irt#e%

2. METHOD

In this section* e "isc#ss the nat#re of socia! +heno.ena* an" three a2s of ta!/in) abo#tthe.: the "escri+tion* the )enera! e1+!anation* an" the "efinition% Thro#)ho#t the artic!e* e i!! or/ith these three a2s to s+ea/ abo#t the socia! +heno.enon of the b#siness c2c!e%

Social phenomena

One of the fe characteristics of the b#siness c2c!e here there is a 4#asi consens#s abo#t* isthat it is not a +heno.enon that sho#!" be in$esti)ate" b2 the nat#ra! sciences* b#t rather one that the

socia! sciences sho#!" be ab!e to e1+!ain% A!so* it is )enera!!2 acce+te" that an2 occ#rrence of this+heno.enon is the res#!t of .#!tit#"e of h#.an actions% This is h2 e i!! ca!! it* an" in$esti)ate itas* acomplexsocial phenomenon% No hat are socia! +heno.ena@ Here is o#r "efinition:

Socia! +heno.ena are actin) .ans choicesan" the necessar2 effects of these choices*in so far as the2 can be .#t#a!!2 #n"erstoo"%

This .eans first* that a!! socia! +heno.ena are born in h#.an intentiona!it2G socia! +heno.enaare intrinsica!!2 teleological% In"ee"* .one2 is for tra"in)* b#ses are for trans+ortation* co#rts are for3#stice* etc% An" so e a)ree ith 5abrie! anotti that it is +recise!2 their intentiona! .eanin)+#r+ose that )i$es &sense an" realityto socia! +heno.ena,%9 It is the intention* an" the intention on!2*

hich initia!!2 .oti$ates h#.an choices an" e$er2thin) that fo!!os fro. these choices%

Secon"* o#r "efinition .eans that socia! +heno.ena are intersubjectiverea!ities* the2 ha$e ha$e a.eanin) hich is in +rinci+!e e4#a!!2 accessib!e to a!! h#.an bein)s% In this a2* for e1a.+!e* e can#n"erstan" an" ta!/ abo#t sa$in) as an act* .one2 as a .eans* +ros+erit2 as an effect%

9&Inters#b3ecti$it2* S#b3ecti$is.* Socia! Sciences* an" the A#strian Schoo! of Econo.ics,*Journal of Markets &Morality* o!% 9J* No 9 S+rin) JJ=* +% 99%

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Ha$in) sai" this* e are face" ith an i.+ortant 4#estion: )i$en that the +ri.e .o$er of an actis a!a2s so.ethin) s#b3ecti$e* hi)h!2 +ersona!* an" not +#b!ic!2 accessib!eG )i$en that nobo"2 can +eerinto .2 hea" an" see hat it is e1act!2 that I "esire in the bi) +ict#re* ho can e sa2 an2thin).eanin)f#! at a!! abo#t socia! +heno.ena@

Here is ho% E$en tho#)h the &+ri.e .o$er, of socia! +heno.ena* that hich )i$es sense tothe.* is in"ee" the #!ti.ate intention* nonethe!ess* the as+ect of .2 actions that i.+arts sense or

"irection onto the or!" boi!s in fact "on to the actualchoice make% An" so in or"er to #n"erstan" asocia! +heno.enon* it is s#fficient to #n"erstan" hat act#a! choices !ie at the root of it%For e1a.+!e*a +erson ho ants to achie$e his on +artic#!ar inter+retation of ha++iness .a2 choose &honestor/ for a "ecent +a2, as a .eans thereto% E$en tho#)h the #!ti.ate )oa! of this .an cannot beobser$e" an" e$a!#ate" b2 an o#tsi"e obser$er* his choices can: e can see hi. at or/* an" e canassess hether he is honest or "ishonest in this en"ea$or%

The choices a .an .a/es are i"ea!!2 in har.on2 ith his intentions: the2 he!+ hi. .o$ec!oser toar"s the )oa!s of his "esire% Hoe$er* +eo+!e often .a/e .ista/es or "e!#"e the.se!$es%Choices .a2 be #n+ro"#cti$e ith re)ar"s to the #!ti.ate en"s* or e$en be in b!atant contra"ictionith these en"s* an" so a +erson ith )oo" intentions .a2 nonethe!ess co..it e$i! an" #n3#st "ee"s%In this a2 for e1a.+!e* Robin Hoo" .a2 ha$e ha" nothin) b#t charitab!e intentions b2 robbin) therich*;b#t nonethe!ess e ha$e to sa2 he as en)a)e" in robber2* not in charit2 since charit2 consistsin han"in) o#t hat is ones on* not hat is fro. others% For hat fo!!os it is i.+ortant to notethat those thin)s abo#t hich e can inters#b3ecti$e!2 co..#nicate an" ho!" each other res+onsib!e*are not o#r intentions* b#t rather the act#a! choices that e .a/e%

Socia! +heno.ena can be $er2 co.+!e1* as for e1a.+!e the b#siness c2c!e is% An2 historica!boo.Kb#st c2c!e has been the res#!t of inn#.erab!e act#a! choices* .a"e b2 tho#san"s or e$en.i!!ions of in"i$i"#a!s% Hoe$er* this sho#!"nt scare #s aa2 fro. tr2in) to e1+!ain it% A brief !oo/ ato#r co!!ea)#es fro. the har" sciences teaches #s that the2 e1+!ain $er2 co.+!e1 +heno.ena s#ch ash#rricanes or $o!cano er#+tions b2 referrin) to the co.bine" a++earance of a fe si.+!e +h2sica!+rinci+!es% So h2 co#!"nt e be ab!e to co.e #+ ith an e1+!anation for the b#siness c2c!e that is

both si.+!e an" $a!i"@ As L#"i) $on Mises sa2s:

&If e scr#tinie the .eanin) of the $ario#s actions +erfor.e" b2 in"i$i"#a!s* e .#stnecessari!2 !earn e$er2thin) abo#t the actions of co!!ecti$e ho!es%,>

The cha!!en)e for e1+!ainin) co.+!e1 socia! +heno.ena* in o#r .in"* is to fin" those si.+!e choicesthat ha$e the e$ent#a! socia! +heno.enon as a necessar2 o#tco.e* an" itho#t hich the+heno.enon co#!" not co.e into e1istence in the first +!ace% In this a2* si.+!e h#.an choices canbe shon to offer a necessar2 an" s#fficient con"ition for the occ#rrence of co.+!e1 socia!+heno.ena%

In this res+ect* see 5abrie! anottis interestin) "isc#ssion on the Neotho.ist "istinction beteen thefinisoperisan" thefinis operantis:

&First* the conte.+orar2 schoo! of Saint Tho.as A4#inas .a/es a "istinction beteen thefinis operisan" thefinis operantisof an actionG the for.er .eanin) &the +#r+ose of the or/, i%e%*the +#r+ose of an architect consists in "esi)nin) a ho#se* an" the !atter .eanin) the #!ti.ateintention of the +erson i%e%* I a. "esi)nin) the ho#se to beco.e rich* or to "o )oo"* or to fin"a "istraction% it sho#!" be sai" that thefinis operisis the /in" of +#r+ose that i"entifies thenat#re of the inters#b3ecti$e re!ation i%e%* .one2 is #se" for * hich therefore .a2 beinters#b3ecti$e!2 trans.itte" an" share"* hereas the #!ti.ate intention of the actin) s#b3ect*.a2* in a""ition to the nat#re of the inters#b3ecti$e re!ation* en" #+ #n"isc!ose" ithin an

inti.ate or!"* !i/e so.e /in" of so!i+sistic e+oche* ith nat#ra! inters#b3ecti$e conse4#ences%Hoe$er* s#ch intentions o#!" not be i"entif2in) the nat#re of the inters#b3ecti$e re!ationshi+at han"%, &Inters#b3ecti$it2* S#b3ecti$is.* Socia! Sciences* an" the A#strian Schoo! ofEcono.ics,*Journal of Markets & Morality* o!% 9J* No 9 S+rin) JJ=* +% 9 L#"i) $on Mises* !uman "ctionFo1 (i!/es: San Francisco* 9* +% >%

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So ho "o e )o abo#t that@ There are three +ractica! ro#tes e s#))est here be!o* b#t in)enera! the .etho" is this: a co.+!e1 socia! +heno.enon can be e1+!aine" b2 reasonin) fro. itseffects* hich are .#ch .ore ob$io#s an" accessib!e to o#r senses* "on to its essentia! ca#ses* bein)$er2 si.+!e* strai)htforar" h#.an choices% Tho.as A4#inas con"ense" it bri!!iant!2 hen he sai"that &e .#st recei$e /no!e")e of the si.+!e fro. the co.+osite an" arri$e at hat is +rior fro.hat is +osterior,


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(e can i!!#strate this b2 a++!2in) it to o#r e1a.+!e of Robin Hoo"% Lets sa2 that e ha$e there*in .e"ie$a!* !e)en"ar2 Nottin)ha.shire* an in$esti)ati$e conte.+orar2 ho itnesses &rich +eo+!ebeco.in) +oorer, on the one han"* an"* on the other han"* &+oor +eo+!e beco.in) richer,% Afteras/in) aro#n" an" after so.e ref!ection* he i"entifies both these effects as ste..in) fro. theco.+!e1 socia! +heno.enon &a )an) of o#t!as !i$in) in the forest* robbin) rich +eo+!es chariots an"han"in) o#t the !oot to +oor +eo+!e,% O#r fe!!o* "eter.ine" to )et to the heart of the .atter* co#!"then )o on to "eco.+ose this +heno.enon in the )enera! +heno.ena of &robbin), an" &han"in) o#tst#ff ,% Ha$in) "one so* it beco.es +ossib!e for hi. to i"entif2 the +heno.enon of &robbin) +eo+!e,to ta/e +ro+ert2 #n!af#!!2 b2 force or threat of force as e1+!ainin) the effect of ea!th2 +eo+!ebeco.in) +oorer* an" the +heno.enon of &han"in) o#t st#ff , to )i$e a share of so.ethin) to eachof a n#.ber of +eo+!e as e1+!ainin) the effect hereb2 +oor +eo+!e beco.e richer% An" so ifso.eone ere to bea. #s bac/ to that ti.e an" +!ace* an" e ere to as/ Robin Hoo"sconte.+orar2 &hat is rea!!2 )oin) on here@,* then the anser o#!" be &there is robbin) )oin) on*an" han"in) o#t of the !oot,% This then* is thegeneral explanation%

In conc!#sion e can sa2 that the )enera! e1+!anation of socia! +heno.ena #!ti.ate!2 a!a2sco.es "on to a "escri+tion of the interaction of a fe si.+!e choices .a"e b2 in"i$i"#a!s%

+$ %he efinition

Des+ite the )reat $a!#e it ob$io#s!2 +ossesses* the )enera! e1+!anation often fai!s at e1+!ainin)h2 a s+ecific +heno.enon .anifests itse!f e1act!2 the a2 it "oes% In other or"s* it "oes not+ro$i"e the c!#es that he!+ one #n"erstan" the effects of a +heno.enon as bein) the ine$itab!e oracci"enta! conse4#ences of hat ca.e before% This is here the "efinition co.es into +!a2% Aristot!eta#)ht that a "efinition ta/es this for. in o#r on or"s:

a +heno.enons essence or nat#re its )en#s P its s+ecific "ifferences

In this a2 e can "efine a +heno.enon b2 "i$i"in) it into* on the one han"* its )en#s* hich is the&fro. hat,* or the &/in", it be!on)s toG an"* on the other han"* in its s+ecific "ifferences* hich

refer to &ho, the +heno.enon e1ists* to hat .a/es it "ifferent fro. other +heno.ena be!on)in) tothe sa.e )en#s% An" so it is that a "efinition consists of a specific cause* referrin) to &ho, the+heno.enon e1ists* an" ageneral cause* referrin) to that &o#t of hich, the +heno.enon e1ists%

Th#s e can for e1a.+!e "efine the +heno.enon &coin, as bein) constit#te" of the s+ecific"ifferences &f!at* ro#n" +iece of .eta!* carr2in) an officia! sta.+, s+ecific ca#se an" the )en#s&.one2, )enera! ca#se% This )en#s can in t#rn be consi"ere" as a s+ecies of an e$en .ore )enera!)en#s% (e can then for e1a.+!e "efine the +heno.enon &.one2, as bein) constit#te" b2 the s+ecific"ifference &)enera!!2 acce+te", an" the )en#s &.e"i#. of e1chan)e,* hich ta/es #s to the essenceof hat a coin rea!!2 is%

B#t h2 sto+ here@ (h2 not tr2 to "i$i"e this )en#s #+ to fin" an e$en .ore )enera! )en#s@

An" then f#rther "eco.+ose that )en#s@ An" so on in"efinite!2@ The reason h2 e sto+ at this +ointis that in the socia! sciences* e "o not st#"2 the reasons ,hy+eo+!e .a/e choices that o#!" be+s2cho!o)2* b#t the conse4#ences of the fact thatthe2 .a/e choices% An" so e can sto+ !oo/in) forca#ses of a co.+!e1 socia! +heno.enon once e ha$e i"entifie" the si.+!e choices that !ie at its root%In the e1a.+!e abo$e* &.e"i#. of e1chan)e, re+resents the act#a! choice that is i.+!icit!2 ore1+!icit!2 ass#.e" hen consi"erin) .one2 in )enera!* or .one2 in its .ore s+ecific for.s: the choiceof certain )oo"s as a .e"i#. of e1chan)e% This choice is preciselyhat ca#ses .one2 to be .one2Gan" the fact that coins are chosen as .e"ia of e1chan)e is h2 e ca!! the. coins%

-raphical representation


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Here is a )ra+hica! re+resentation of the three a2s e can ta!/ abo#t a +heno.enon% The)enera! e1+!anation "escribes the )enera! ca#se of the +heno.enon* that hich e1+!ains the &sort, or&fa.i!2, to hich it be!on)s% No* a +heno.enon "oes not on!2 has )enera! ca#ses* it a!so has s+ecificca#ses% The "efinition of a +heno.enon is co.+ose" of the )enera! ca#se an" the s+ecific ca#se* or)en#s an" s+ecific "ifference% Fina!!2* a +heno.enon a!so +ro"#ces effectsG necessar2 effects* hiche ca!! +ro+erties* an" #nnecessar2 effects* hich e ca!! acci"ents% A "escri+tion of a +heno.enons#.s #+ fe or .ore of these effects%

What oes this means for our investigation of the business cycle.

(ith the abo$e* e no ha$e a theoretica! fra.eor/ that is st#r"2 eno#)h for an in$esti)ationinto the roots of the b#siness c2c!e% This is ho e sha!! )o abo#t it: first* e #se a "escri+tion too#t!ine the )enera! +ro+erties of the b#siness c2c!eG ne1t* as e #nco$er the essentia! choices that !ie atthe root of the b#siness c2c!e* e for.#!ate a theor2 that e1+!ains the conse4#ences of these choicesas +ro+erties of the b#siness c2c!eG an" fina!!2* after e1+!ainin) the a""itiona! +ro+erties of theb#siness c2c!e* e co.bine the si.+!e socia! +heno.ena that ha$e been i"entifie" as ca#ses of theb#siness c2c!e into o#r "efinition%

3. DESCRI?TIONOFTHEBUSINESSCYCLE

The b#siness c2c!e see.s to +ossess three .ain +ro+erties* characteristics that are inherent to itan" that cannot be re"#ce" to each other% First* the b#siness c2c!e is a cyclical+heno.enon* secon"* itis a recurrent+heno.enon* an" thir"* it is apervasive+heno.enon%

(ith &c2c!ica!,* e .ean that the +heno.enon consists of "ifferent +hases that necessar2fo!!o each other thro#)ho#t ti.eG ith &rec#rrent,* e .ean that it is a +heno.enon that occ#rs notirre)#!ar!2* b#t ith consistent re+etitionG an" ith &+er$asi$e,* e refer to the fact that hen the+heno.enon stri/es in a certain re)ion* $irt#a!!2 no one is !eft #nto#che" b2 it%

(ith these )enera! +ro+erties as a )i$en* e can no for.#!ate a "escri+tion of the b#sinessc2c!e% (e s#))est the fo!!oin): &the b#siness c2c!e is a c2c!e hich is +er$asi$e an" rec#rrent,%

Let #s no !oo/ into each of the .ain +ro+erties se+arate!2* tracin) the. bac/ to the si.+!esocia! +heno.enon that ca#ses the.% 5i$en its i.+ortance an" co.+!e1it2* the characteristic of

Another reason h2* "es+ite its a++arent "#!!ness an" s#+erficia!it2* it is #sef#! to .ention this "escri+tion ofthe b#siness c2c!e* is that it re$ea!s a!rea"2 hat the b#siness c2c!e is not: the b#siness c2c!e is not & a c2c!ica! an"rec#rrent +er$asi$eness,* nor o#!" e ca!! it &a +er$asi$e an" c2c!ica! rec#rrence,% This is a!rea"2 an in"icationthat &c2c!e, is in fact hat the )enera! +art of the "efinition i!! refer to* an" that &rec#rrence, an"&+er$asi$eness, i!! be rather hat is referre" to b2 the s+ecific "ifference in the "efinition* in the sa.e a2 asthat in &se!!in) cars,* &se!!in), is the )en#s an" &cars, the s+ecific "ifference%

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c2c!ica!it2 i!! ta/e the b#!/ of this artic!e% After ha$in) "ea!t ith that* e i!! )i$e a briefer ana!2sis ofthe characteristics of rec#rrence an" +er$asi$eness%

4. (HYISTHEBUSINESSCYCLEACYCLICAL?HENOMENON@

What is a Cycle?

(e here "efine a c2c!e as a causal chain of phenomena ,hereby the first phenomenon in the chain isessentially ientical to the last one% A s+ecific c2c!e is then in itse!f a co.+!e1 +heno.enon that can be"eco.+ose" into se+arate +hases% C2c!e "eri$es fro. 5ree/ kyklos* circ!e* an" in"ee"* a c2c!e is acirc#!ar s#ccession of e$ents% One +ro+ert2 inherent to c2c!es is that the2 are reproucible* a secon" isthat the2 are temporal* i%e%* stretche" o#t in ti.e%

The cyclicality of the business cycle

Here* e a""ress the cyclicalityof the b#siness c2c!e an" atte.+t to trace it bac/ to the si.+!esocia! +heno.enon that ca#se" it% In hisMan/ *conomy/ an State* M#rra2 Rothbar" +ro$i"es a short"escri+tion of the c2c!ica! characteristics of the b#siness c2c!e:

The b#siness c2c!e has ha" certain "efinite feat#res hich re$ea! the.se!$es a)ain an" a)ain%First* there is a boo. +erio"* hen +rices an" +ro"#cti$e ca+acit2 e1+an"% There is a )reaterboo. in the hea$2 ca+ita!K)oo"s an" hi)herKor"er in"#striesKs#ch as in"#stria! ra .ateria!s*.achine )oo"s* an" constr#ction* an" in the .ar/ets for tit!es to these )oo"s* s#ch as the stoc/.ar/et an" rea! estate% Then* s#""en!2* itho#t arnin)* there is a &crash%, A financia! +anicith r#ns on ban/s ens#es* +rices fa!! $er2 shar+!2* an" there is a s#""en +i!in) #+ of #nso!"in$entor2* an" +artic#!ar!2 a re$e!ation of )reat e1cess ca+acit2 in the hi)herKor"er ca+ita! )oo"sfo!!os% A +ainf#! +erio" of !i4#i"ation an" ban/r#+tc2 fo!!os* acco.+anie" b2 hea$2#ne.+!o2.ent* #nti! reco$er2 to nor.a! con"itions )ra"#a!!2 ta/es +!ace%=

This "escri+tion is in A#strian circ!es b2 no a tra"itiona! acco#nt of the b#siness c2c!e 4#ac2c!e: the boo.K+hase is fo!!oe" b2 a b#stK+hase* hich a!!os for the reco$er2 bac/ to nor.a!% An"so the b#siness c2c!e consists of three +hases: a +hase of .is+!ace" o+ti.is. an" ron) in$est.ents*a +hase here these errors beco.e a++arent* an" a +hase here these errors are correcte"% E1+!ainin)the c2c!e th#s a.o#nts to e1+!ainin) the ori)ins of c!#sters of errors% Rothbar" for.#!ates the4#estion as to hat ca#ses these errors:

&No B#siness.an in the rea! or!" is e4#i++e" ith +erfect /no!e")eG a!! .a/e errors% B#t thefreeK.ar/et +rocess +recise!2 rear"s those b#siness.en ho are e4#i++e" to .a/e a .ini.#.n#.ber of errors% (h2 sho#!" there s#""en!2 be a c!#ster of errors@,

Qess H#erta "e Soto for.#!ates the +rob!e. in .ore +recise ter.s:&Crisis an" econo.ic recession ha$e hit* essentia!!2 "#e to a !ac/ of rea! sa$e" reso#rces ithhich to co.+!ete in$est.ent +ro3ects hich* as has beco.e a++arent* ere too a.bitio#s% Thecrisis is bro#)ht to a hea" b2 excessive investment&o$erin$est.ent, in the sta)es f#rthest fro.cons#.+tion* i%e%* in ca+ita! )oo"s in"#stries co.+#ter softare an" har"are* hi)hKtechco..#nications "e$ices* b!ast f#rnaces* shi+2ar"s* constr#ction* etc%* an" in a!! other sta)esith a i"ene" ca+ita! )oo"s str#ct#re% It a!so er#+ts "#e to a +ara!!e! relative shortage ininvestmentin the in"#stries c!osest to cons#.+tion% The co.bine" effect of the to errors is )enera!ie"malinvestment of +ro"#cti$e reso#rcesG that is* in$est.ent of a st2!e* 4#a!it2* 4#antit2* an")eo)ra+hic an" entre+rene#ria! "istrib#tion t2+ica! of a sit#ation in hich .#ch .ore $o!#ntar2sa$in) has ta/en +!ace%,

So ho "o e e1+!ain the occ#rrence of these .a!in$est.ents@9JH#erta De Soto* as .ostA#strian econo.ists fro. Mises onar"s* +oints at the +ractice of cre"it e1+ansion:

=M#rra2 N% Rothbar"*Man/ *conomy an State ,ith 0o,er an Market* +%


9/24

&the increase" s#++!2 of !oans hich res#!ts fro. cre"it e1+ansion i!! initia!!2 e1ert an effect$er2 si.i!ar to that +ro"#ce" b2 the f!o of ne !oans fro. sa$in) : it i!! ten" to ca#se ai"enin) an" !en)thenin) of the sta)es in the +ro"#cti$e str#ct#re% The re!ati$e re"#ctioncre"it e1+ansion ca#ses in the interest rate boosts the +resent $a!#e of ca+ita! )oo"s* since thef!o of rents the2 are e1+ecte" to +ro"#ce increases in $a!#e hen "isco#nte" #sin) a !oer.ar/et rate of interest% In a""ition* the !oerin) of the interest rate )i$es the a++earance of+rofitabi!it2 to in$est.ent +ro3ects hich #nti! that +oint here not +rofitab!e* )i$in) rise to

ne sta)es f#rther fro. cons#.+tion* i%e%* sta)es hich are .ore ca+ita!Kintensi$e% Inshort* entre+rene#rs "eci"e to !a#nch ne in$est.ent +ro3ects* i"enin) an" !en)thenin) theca+ita! )oo"s sta)es in the +ro"#cti$e str#ct#reG that is* the2 act as if societ2s sa$in) ha"increase"* hen in fact s#ch an e$ent has not occ#rre"% This tri))ers a +rocess of.a!a"3#st.ent or "iscoor"ination in the beha$ior of the "ifferent econo.ic a)ents% In an#tshe!!* this is an in"#ce.ent of .ass entre+rene#ria! error in econo.ic ca!c#!ation%,99

He s#..aries:

&In short* entre+rene#rs ha$e in$este" an ina++ro+riate a.o#nt in an ina"e4#ate .anner in theron) +!aces in the +ro"#cti$e str#ct#re beca#se the2 ere #n"er the i.+ression* eceive as they,ere by bank creit expansion* that socia! sa$in) o#!" be .#ch )reater%,9

An" so e ha$e trace" bac/ the boo.Kb#st character of the b#siness c2c!e bac/ to "ece+tion ofentre+rene#rs b2 .eans of ban/ cre"it e1+ansion%9;L#"i) $on Mises "escribes the ro!e of fi"#ciar2.e"ia the .one2 s#bstit#tes ban/ cre"it e1+ansion +ro"#ces as fo!!os in his or/ !uman "ction:

&Iss#ance of a""itiona! fi"#ciar2 .e"ia* no .atter hat its 4#antit2 .a2 be* a!a2s sets in.otion those chan)es in the +rice str#ct#re the "escri+tion of hich is the tas/ of the theor2 ofthe tra"e c2c!e%,9>

Let #s re.in" o#rse!$es hat is .eant b2 the ter. &fi"#ciar2 .e"ia,:

&If the .one2 reser$e /e+t b2 the "ebtor a)ainst the .one2Ks#bstit#tes iss#e" is !ess than thetota! a.o#nt of s#ch s#bstit#tes* e ca!! that a.o#nt of s#bstit#tes hich e1cee"s the reser$efi"#ciar2 .e"ia%,9* +% ;=% For .ore on this* see theear!ier section &socia! +heno.ena,* es+ecia!!2 footnote %

9As the Latin "ict#. )oes: &Fraus et jus num9uam cohabitant,G here there is 3#stice* there is no fra#"* an" $ice$ersa%On the conce+t of the con$i$ia! or"er* see the or/ of Fran/ $an D#n% In his &Conce+ts of Or"er, JJ* +% ;%There he rites* for e1a.+!e: &A con$i$ia! or"er is not a societ2% It is a cata!!a12* an or"er of frien"!2 e1chan)e a.on)in"e+en"ent +ersons% (e can fin" e1a.+!es of con$i$ia! or"er % % % here$er +eo+!e .eet an" .in)!e an" "o b#sinessin their on na.e* hether or not the2 be!on) to the sa.e or an2 socia! or)anisation% % % % The +ara"i). of

con$i$ia!it2 is a re!ation beteen nat#ra! +ersons%,;&The !a of the first societ2 is-&!et #s act in )oo" faith, bona fie agito % % % Th#s* in the Ro.an s2ste. of ri)ht* atti.es* the e1+ression &)oo" faith, is ta/en to si)nif2 nat#ra! ri)ht itse!f%, 5ia.battista ico* 1niversal 3ightA.ster"a.: Ro"o+i* JJJ* +% >% (hen +eo+!e act in ba" faith* are "o#b!eK.in"e" an" "eceitf#!* the con$i$ia! or"erceases to e1ist: &it o#!" be i.+ossib!e for .en to !i$e to)ether* #n!ess the2 be!ie$e" one another* as "ec!arin) thetr#th one to another, Tho.as A4#inas* Summa %heologiae* IIKII* 9J* art% ;% Toon $an Ho#"ts co..ent here he"escribes the $ies of the scho!astic theorists is a!so $er2 re!e$ant in this res+ect% See Toon $an Ho#"t*6n the *ge of%ruth an !onesty* onin/!i3/e Bri!! N: Lei"en* JJ +% %

>Fran/ $an D#n* &Conce+ts of Or"er,* JJ% Cite" ith the a#thors +er.ission%

99


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tr#st that e1ists in the con$i$ia! societ2 is e1+resse" in tr#stin) re!ationshi+s beteen in"i$i"#a!s* or&tr#sts,% In a tr#st* a trustor ass#.es the tr#thf#!ness of another +erson an" has )oo" reasons toe1+ect that the other i!! +erfor. one or .ore actions%These )oo" reasons .a2 be i.+!icit*e.be""e" in the socia! an" c#!t#ra! conte1t* or* the2 can be .a"e e1+!icit* for e1a.+!e b2 a s+ecific+ro.ise of the other +erson% The +erson herein the tr#st to +erfor. a certain action is +!ace"* isho. e can ca!! the trustee%

+% 6n the nature of frau7 injustice an imaginary goos

In3#stice* then* in$o!$es a trans)ression of this nat#ra! or"er: the !abrea/er ref#ses to !i$eithin his .eans an" #n3#stifiab!2 interferes ith the .eans of others% (e can "efine an #n3#st actionor $io!ation i%e%* an action $io!atin) 3#stice as an action that is bro#)ht to bear on a +erson or his+ro+ert2 b2 an e1terna! a)ent* contrar2 to reason%=

+% 6n ho, frau prouces imaginary goos

(e no ha$e a better #n"erstan"in) of ho fra#" is a breach ith hat as before% 5i$en thatfra#" is base" on "ece+tion* i%e%* a "istortion of so#n" 3#").ent* it fo!!os that the +erson ho iss#b3ecte" to fra#" .isconcei$es certain nonKe1istin) reso#rces as e1istin)* or .isconcei$es certain#ns#itab!e reso#rces as bein) s#itab!e% This i!!#sionar2 rea!it2 is constit#te" of hat e .a2 ca!!imaginary goos% Let #s no in$esti)ate hat is #n"erstoo" b2 this%

In the act of fra#"* the "ece+tion of the sin"!er i.+rints in the .in"s of his $icti.s an#n"erstan"in) of the or!" that is not confor. to the a2 thin)s rea!!2 are: he .a/es the. be!ie$e inthe e1istence of )oo"s that "o not act#a!!2 e1ist* or he secret!2 chan)es the state of affairs* th#sinsti!!in) in the. the .ista/en be!ief that act#a!!2 re.o$e" )oo"s are sti!! a$ai!ab!e to the.% In eithercase* s#++ose" )oo"s are create" that a++ear to be &fitte" to satisf2 h#.an ants,* b#t "o notact#a!!2: imaginary goos% (e here #se this ter. in !ine ith Car! Men)ers "efinition: &thin)s that areinca+ab!e of bein) +!ace" in an2 /in" of ca#sa! connection ith the satisfaction of h#.an nee"s thatare ne$erthe!ess treate" b2 .en as )oo"s,%

Men)er sa to +ossib!e a2s in hich i.a)inar2 )oo"s can co.e into bein):

&9 hen attrib#tes* an" therefore ca+acities* are erroneo#s!2 ascribe" to thin)s that "o notrea!!2 +ossess the.* or hen nonKe1istent h#.an nee"s are .ista/en!2 ass#.e" to e1ist% Inboth cases e ha$e to "ea! ith thin)s that "o not* in rea!it2* stan" in the re!ationshi+ a!rea"2

%

For hat fo!!os* it is i.+ortant to note that* since i!!in) i.+!ies /noin)* i)norance ca#sesin$o!#ntariness% As Tho.as A4#inas sa2s*

&% % % a .an .a2 be i)norant of so.e circ#.stance of his act* hich he as not bo#n" to /no* theres#!t bein) that he "oes that hich he o#!" not "o* if he /ne of that circ#.stance % % % S#chi)norance ca#ses in$o!#ntariness si.+!2,% Tho.as A4#inas* Summa %heologica* IIKI* * art% &(hether

i)norance ca#ses in$o!#ntariness@,%The reason h2 this is i.+ortant is that it .eans that in the case of fra#"* the i)norant $icti. has in"ee"

been .ani+#!ate"* or his .eans $io!ate"* against his ,ill%

One co#!" re.ar/ here that the or" for "ece+tion in 5er.anic !an)#a)es be"ro) in D#tch* Betr#) in5er.an* is re!ate" to the on% raugr)host* the os%girog a++earance* chi.era* t% bitriagaa".inisterin) "a.a)ein a c#nnin) a2 an" the oi% rogha"a.a)e% In"ee"* .a!a fi"e "ece+tion* an" th#s a!so fra#"* "e!iberate!2 brin)sabo#t a har.f#! i!!#sion or .enta! hi)h to or/ to the a"$anta)e of the "ecei$erZsin"!er* an" to the "etri.ent ofthe $icti.%

Mises* !uman "ction* +% ;%

9


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"escribe" as "eter.inin) the )oo"sKcharacter of thin)s* b#t "o so on!2 in the o+inions of+eo+!e%,;J

Men)er errs* as has been +ointe" o#t b2 Mises;9* hen he c!ai.s in an e!aboration of thati.a)inar2 )oo"s can "eri$e fro. &i.a)inar2 $a!#e, or &i.a)inar2 ants,% The reason h2 Men)er is.ista/en is that i.a)ination +hantas2* i!!#sion #!ti.ate!2 s+rin)s fro. the senses* ; b#t $a!#e an"ants #!ti.ate!2 "o not% Hence* ants nor $a!#e can +ossib!2 be i!!#sor2% Hoe$er this "oes not in the

!east ref#te the +ossibi!it2 of the rea!it2 of i.a)inar2 )oo"s* since the first ca#se of this +heno.enonas s#))este" b2 Men)er* the fa!se ascri+tion of ca+acities to thin)s that "o not rea!!2 +ossess the.* is+erfect!2 $a!i"% Ca+acities of s#bstances are in"ee" "etecte" b2 the senses* an" can therefore be+ercei$e" here the2 are not +resent* or o$er!oo/e" here the2 are% It fo!!os that the "istinctionbeteen i.a)inar2 an" tr#e )oo"s is a $a!i" one%

It is interestin) to note that hi!e Men)ers criteria of the )oo" c!ear!2 e1c!#"e i.a)inar2 )oo"sas act#a! )oo"s Men)er sti+#!ates the re4#ire.ent of an ob3ecti$e!2 +ossib!e ca#sa! connectionbeteen the "esire" en" an" the +otenc2 of the reso#rces* Misess s#))este" correction of Men)er infact !#.+s to)ether i.a)inar2 )oo"s ith act#a! )oo"s% (rites Mises:

&% % % the thir" +rere4#isite for a thin) to beco.e a )oo" o#!" ha$e to rea": the opinionof the

econo.iin) in"i$i"#a!s that the thin) is ca+ab!e of satisf2in) their ants,

;;

Mises )oes on to reco)nie that &this .a/es it +ossib!e to s+ea/ of a cate)or2 of &i.a)inar2,)oo"s,* on!2 to "is.iss the "istinction as &+oint!ess,G reason bein) that i.a)inar2 )oo"s are a!so so!"for rea! +rices in the .ar/et+!ace%

Later a#thors in the A#strian tra"ition a!so see. to ha$e re3ecte" or at !east br#she" asi"e thecate)or2 of i.a)inar2 )oo"s% Qose+h T% Sa!erno* for e1a.+!e* in *pistemological 0roblems of *conomicScience+% 9%

Secon"* e ho!" that reco)niin) the e1istence of i.a)inar2 )oo"s are cr#cia! to #n"erstan"in) theor/in)s of the b#siness c2c!e an" ith that* of #n"erstan"in) the A#strian B#siness C2c!e Theor2%

Here is h2: the funamental explanation of ,hy crises an recessions inevitably must take place follo,ing anyfrauulent expansion of the money supply/ lies exactly in the fact that creit expansion in the form of e1 nihi!ocreation of fiuciary meia essentially amounts to the generation of imaginary goos$Reco)nition of this fact !ea"s

;J Car! Men)er* 0rinciples of *conomics* A#b#rn* A!a%: L#"i) $on Mises Instit#te* JJ=* +%


14/24

to the insi)ht that the b#st +hase of the crisis is si.+!2 the +o+ of an i!!#sionar2 b#bb!e an" a ret#rnto rea!it2%

An" so e can conc!#"e here* ith the assertion that i.a)inar2 )oo"s are a necessar2 effect* or a+ro+ert2* of fra#"%

5. A DESCRI?TIONOFTHEFRAUDCYCLE

No that e ha$e estab!ishe" that fra#" necessari!2 )enerates c2c!es* that fra#" !ea"s to in3#stice*an" that fra#" +ro"#ces i.a)inar2 )oo"s* !et #s no +rocee" to a .ore "etai!e" "escri+tion of thefra#" c2c!e% As e i!! see in hat fo!!os* this c2c!e can be "i$i"e" in three )enera! +hases: the first isthe +hase of "ece+tion* the secon" is the +hase of re$ea!in) the "ece+tion* an" the thir" is the +haseof reco$er2%;


15/24

)oo"s% &Inf!ation, "eri$es fro. the Latin $erb inflare* fro. in;&into, Pflare&to b!o,% The creationof i.a)inar2 )oo"s in"ee" .a/es the tota! s#++!2 of )oo"s see.in)!2 se!!* in the sa.e a2 as that*hen seen fro. a "istance* a ater ba!!oon see.s to contain e$er .ore ater* hi!e in fact it isinf!ate" ith e$er .ore air% Li/eise* the &hot air, of the i.a)inar2 )oo"s !ea"s to a seeming b#tnone1istent e1+ansion of the s#++!2 of tr#e )oo"s% This is h2 e consi"er the or" &inf!ation, a+tin this conte1t* an" ca!! this +hase the inflationary boom%;

As !on) as the "eceit !asts* the fra#" $icti. fin"s hi.se!f in a &e#+horica!, state of .in"* in thathe i.a)ines to +ossess .ore .eans than rea!!2 is the case% Conse4#ent!2* he i!! in$est his .eans in"ifferent a2s than otherise o#!" ha$e been the case% These in$est.ent choices i!! !ater +ro$e tobe base" on a .ista/en esti.ation of a$ai!ab!e reso#rces* hich is h2 so.e* or .an2* i!! e$ent#a!!2ha$e to be !i4#i"ate" beca#se there si.+!2 is not eno#)h ca+ita! a$ai!ab!e for the.% In short* fra#"!ea"s to malinvestments% A secon" i.+!ication of the .isconcei$e" s#++!2 of .eans is that* since the$icti. i.a)ines to ha$e co..an" o$er .eans that are .ore +otent than act#a!!2 is the case* he i!!a!so #!ti.ate!2 cons#.e .ore an" sa$e !ess than o#!" ha$e been the case in absence of the "eceit%Another conse4#ence of fra#" is th#s overconsumption%

Phase II: Crisis

The secon" +hase of the fra#" c2c!e* the crisis* is initiate" at the +oint in ti.e here the i!!#sionhas reache" its .a1i.#. sie si.+!2 beca#se it cannot )et bi))er after this: the .o.ent here thefra#" is re$ea!e"% L#"i) $on Mises* in his "escri+tion of the b#siness c2c!e* #se" the ter.=atastrophenhausseto in"icate this .o.ent* an" it i!!#strates the essence of this +oint in the c2c!e e!!:the s#""en t#rn catastro+he fo!!oin) the rise ha#sse% At so.e +oint in ti.e the )enie !ea$es thebott!e* the &hi)h, ears off an" )i$es rise to the ine$itab!e "ont#rn% (hat +ro$o/es this "ont#rn isthe b#rstin) of the i!!#sion create" b2 the sin"!er% The $icti. no rea!ies he has been foo!e": thefi"#ciar2 to/ens he recei$e" fro. the sin"!er no !on)er co$er the f!a) or "#t2 the2 e.bo"ie"% 5#i"oH6!s.ann +#ts it this a2:

&The $icti. of fra#"#!ent beha$ior is not aare of his sit#ation an" th#s beha$es as ife$er2thin) as sti!! in or"er% he "oes not /no that the 4#antit2 of his .eans has been"i.inishe"% Therefore* he i!! not a"3#st the str#ct#re of his +ro+ert2 to the ne circ#.stances% ?eo+!e "o not a++rehen" that the ca+ita! stoc/ has been "i.inishe" b2 the e.be!er an"nee"s to be refi!!e" thro#)h sa$in)s% Sooner or !ater the2 i!! "isco$er this error% This is henthe crisis sets in%,;

The confrontation ith the "eceit .a/es the #ntenabi!it2 of the sit#ation ob$io#s: the s#. ofthe $icti.s .eans no t#rns o#t to be s.a!!er than he tho#)ht it as at an2 rate it can ser$e hisintentions !ess e!!* an"* conse4#ent!2* this +rohibits hi. fro. contin#in) on the sa.e &in$est.ent+ath,% The sin"!er as e!! notices the chan)e of c!i.ate an" i!! ha$e to chan)e his strate)2% This ishat e can ca!! the crisis5ri% krisis: &conf!ict,* b#t a!so &"ecision,: the "eci"in) .o.ent* the &ho#r

of tr#th,* has co.e* an" the hi""en conf!ict brea/s !oose% It is no c!ear that the tr#st that the $icti.ha" +!ace" in the sin"!er as +ainf#!!2 .is)#i"e"%

Phase II: Correction !epression "eco#ery

The ine$itab!e !oss in confi"ence serio#s!2 affects the $a!#e of the $icti.s fi"#ciar2 to/ensGthese ha$e no a++eare" to consist !ar)e!2* or co.+!ete!2* o#t of &hot air,% This ca#ses the i!!#sor2b#bb!e to "ef!ate* an" the inf!ationar2 boo. re$erses in a eflationary correction%>J In the or"s of

; In his !uman "ction* Mises arne" a)ainst the #se of +o+#!ar ter.s s#ch as &inf!ation, in aca"e.ic+ra1eo!o)ica! "isco#rse:

The notions of inf!ation an" "ef!ation are not +ra1eo!o)ica! conce+ts% The2 ere not create" b2econo.ists* b#t b2 the .#n"ane s+eech of the +#b!ic an" of +o!iticians% % % % inf!ation an" "ef!ationare ter.s !ac/in) the cate)oria! +recision re4#ire" for +ra1eoIo)ica9* econo.ic* an" cata!!acticconce+ts% Their a++!ication is a++ro+riate for histor2 an" +o!itics% !umanAction* +% >9K>J

Nonethe!ess e thin/ the ter.s of inf!ation an" "ef!ation* if +ro+er!2 "efine"* can +ro$e #sef#! in c!arif2in)the the "2na.ics of both the &cata!!actic, b#siness c2c!e as e!! as the .ore )eneric fra#" c2c!e%

;5#i"o H6!s.ann* &Toar" a 5enera! Theor2 of Error C2c!es,* +% 9%

>JIn the conte1t of the fra#" c2c!e* an" #n"erstan"in) &!a, as &or"er,* e a)ree ith ?hi!i++ Ba)#s hen hestates that &"ef!ation* in contrast to inf!ation* is not a &breach, of the !a,* b#t rather* it is the restoration of

9


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H6!s.ann: &the &crisis, .ar/s the +oint in ti.e hen the error is "isco$ere"% Then be)ins thesecon" sta)e* a +hase of reestab!ishe" sobriet2%,>9D#rin) this +rocess* the fra#" $icti. atte.+ts toe1chan)e the fi"#ciar2 to/ens he +ossesses into tr#e )oo"s &f!i)ht into rea! )oo"s,% Hoe$er* sincethese are not co$ere" b2 tr#e )oo"s* he i!! ine$itab!2 !oose a!! or a !ar)e +art of his ori)ina!in$est.ents ith the sin"!er%

The &e#+horia, of the inf!ationar2 boo. has th#s been re+!ace" b2 a +rocess of &soberin) #+,G

the $icti. of the fra#" no assesses the .eans that are to his "is+osa! in a .ore rea!istic a2% This+ainf#! +rocess* hereb2 .isconce+tions beco.e .anifest an" the $icti. is confronte" ith the tr#thof the .atter* is hat e can ca!! the epression% The restoration of his on so#n" 3#").ent in thestate of affairs is at the sa.e ti.e the be)innin) of the recovery process% This is the +rocess hereb2 the$icti. rea"3#sts his cons#.+tion an" in$est.ent +attern in a!i)n.ent ith the act#a! .eans that are#n"er his co..an"% In this a2* he frees hi.se!f fro. the "isor"er bro#)ht abo#t b2 the !ies of thesin"!er% (hen this +rocess is finishe"* or"er is restore" an" the fra#" c2c!e is bro#)ht to a c!ose%

$raphical Illustration of the Fraud Cycle

5i$en a!! the +rob!e.s in$o!$e" ith the $is#a! an"Zor 4#antitati$e re+resentation of theor2 in the

fie!" of a1io!o)ica! science* e s#))est the )ra+hica! i!!#stration be!o .ere!2 for e"#cationa!+#r+oses* in an atte.+t to )i$e so.e o$ersi)ht of ho the si.#!taneo#s an" s#ccessi$e +heno.enain$o!$e" in the fra#" c2c!e coe1ist%

Fra#"#!ent "ece+tion ca#ses the )eneration an" "e)eneration of i.a)inar2 )oo"s o$er ti.e%Hence the to a1es of o#r )ra+hica! i!!#stration of the fra#" c2c!e: time8 $ers#s goos;characterY%The 8Ka1is is "i$i"e" into three +erio"s of ti.e:

9% First co.es the +erio" of orer* "#rin) hich +eo+!e are tr#thf#! an" "ea! ith each other in)oo" faith% There is no "ece+tion* hich .eans that each actor !i$es ithin his .eans* notc!ai.in) co..an" o$er .eans that are not his% This absence of "ece+tion f#rther i.+!ies thatnobo"2 is "ecei$e" into i.a)inin) certain )oo"s to be +resent an" a$ai!ab!e that in fact are not%D#rin) the +hase of or"er* the actors in 4#estion sti!! co..it entre+rene#ria! errors* ith theconse4#ent a++earance of i.a)inar2 )oo"s* an" the .a!in$est.ent an" o$ercons#.+tionfo!!oin) this% Hoe$er e "ont consi"er these here* since e are "ea!in) ith the effects offra#" an" not those of error in )enera!%

% Ne1t is the first +hase of the fra#" c2c!eG the +hase "#rin) hich the act#a!frau in one or.#!ti+!e acts ta/es +!ace% In the i!!#stration there are three acts of fra#"* .ar/e" b2 T9* T*an" T;% E$er2 act of fra#" ca#ses a "ecrease in the a$ai!abi!it2 of +ro+er .eans the i!!#stration

the !a,% ?hi!i++e Ba)#s* &Def!ation: (hen A#strians Beco.e Inter$entionists,* %he >uarterly Journal of "ustrian*conomics$o!% * no% > (inter JJ;* +%


17/24

"oes not consi"er acci"enta! increases or "ecreases #nre!ate" to the fra#"* an" an increase inthe a.o#nt of "e+ri$e" .eans% The act#a! !osses s#ffere" beca#se of the fra#" are co$ere" #+b2 a si.#!taneo#s creation of i.a)inar2 )oo"s%>

;% The secon" an" thir" +hase of the c2c!e are those of crisis an" recovery% It starts hen thefra#" co.es to !i)ht crisis* an"* as a conse4#ence* the i.a)inar2 )oo"s shrin/ ra+i"!2 in

$o!#.e "#rin) a "ef!ationar2 correction% This is a!so hen the +rocess of "e+ri$ationtransfor.s into a rea"3#st.ent or reco$er2 +rocess* consistin) of a rea!!ocation of the.a!in$este" )oo"s an" an increase in sa$in)s "ecrease in cons#.+tion% The fra#" c2c!e en"shen the "a.a)e or "e+ri$ation ca#se" b2 the fra#" has been #n"one%

"eformulating the general theory of the fraud cycle in specific terms

In this section* e e1+!ain ho the +ro+erties of the b#siness c2c!e-the inf!ationar2 boo.*o$ercons#.+tion an" .a!in$est.ent* the crisis* "ef!ationar2 correction an" "e+ression-ho a!! these+ro+erties are ca#se" b2 the )enera! +heno.enon of the fra#" c2c!e%

Phase I: Fraudulent creation of money titles

%he )anker an the 3esulting %rust

Ban/ers* at !east tra"itiona!!2* are entre+rene#rs ho o+erate in the .ar/et an" ho offer certainser$ices to the +eo+!e% More s+ecifica!!2* ban/ers are entr#ste" ith .one2 b2 their c#sto.ers* an"+ro.ise to han"!e this .one2 in s+ecific a2s% There is th#s a re!ationshi+ of tr#st beteen ban/ersan" their c#sto.ers* in the conte1t of hich the2 enter into for.a! a)ree.ents ith one another%(hen c#sto.ers han" o$er .one2 to their ban/er in the for. of a !oan or a "e+osit*>; the for.a!a)ree.ent in$o!$e" is essentia!!2 a trust%>>In the case of a "e+ositorK"e+ositar2 re!ationshi+* the for.a!

a)ree.ent in 4#estion is .ore s+ecifica!!2 a resulting trust$>;For an e!aborate "isc#ssion on the tra"itiona! !e)a! nat#re of the !oan contract an" "e+osit contract* as e!! as for a"etai!e" historica! acco#nt of the se+arate #se of these to contract in ban/in)* see Qess H#erta "e Soto*Money/ )ank(reit/ an *conomic (ycles* cha+ters 9 an" % See a!so Q[r) 5#i"o H6!s.ann* &Ban/s Cannot Create Mone2,* %henepenent 3evie,* $%* n%9* S#..er JJJ* ++% 9J9\99J

>> &tr#st* n$ 9% The ri)ht* enforceab!e so!e!2 in e4#it2* to the beneficia! en3o2.ent of +ro+ert2 tohich another +erson ho!"s !e)a! tit!eG a +ro+ert2 interest he!" b2 one +erson the trustee at there4#est of another the settlor for the benefit of a thir" +art2 the beneficiary% For a tr#st to be $a!i"* it.#st in$o!$e s+ecific +ro+ert2* ref!ect the sett!orWs intent* an" be create" for a !af#! +#r+ose%,B!ac/Ws La Dictionar2 =th e"% 9* +% 9* +% ;JJ%* as 4#ote" in RobertCha.bers* 3esulting %rustsO1for" Uni$ersit2 ?ress: Ne Yor/* 9>* +% 9% Cha.bers f#rther 4#otes the essentia!characteristic of the res#!tin) tr#st as bein) &the +erson in hose fa$o#r the tr#st arises is the +erson ho +ro$i"e"the +ro+ert2 or e4#itab!e interest $este" in the +erson bo#n" b2 the tr#st,G 4#otin) ibi"%* +% ;J% On the histor2 of the!e)a! instit#tion of the res#!tin) tr#st* see cha+ter 9> &Un3#st Enrich.ent, of Da$i" Q% Ibbetson* " !istoricalntrouction to the 8a, of 6bligations* Ne Yor/: O1for" Uni$ersit2 ?ress* 9* ++% >K>* es+% +% =%

9=


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an" their c#sto.ers for.a! an" bin"in)* ban/ers ha$e tra"itiona!!2 for.a!ie" an" .a"e e1+!icit theirfi"#ciar2 "#ties b2 ritin) o#t .one2 tit!es* hich are essentia!!2 fi"#ciar2 to/ens that confir. that acertain c#sto.er 8 is entit!e" to recei$e a certain a.o#nt of .one2 fro. the ban/er* either at ish"e+osit or after an a)ree" #+on +erio" of ti.e !oan%

No if the ban/er rites o#t .one2 tit!es in e1cess of the act#a! .one2 he has in his on+ossession i%e%* .one2 !ent to or one" b2 hi.* he co..its the cri.e of frau* since he )i$es aa2

so.ethin) that "oes not be!on) to hi.* th#s "e+ri$in) the ori)ina! oner fro. his +ro+ert2* hi!e+reten"in) that is not the case%>The .one2 tit!es that are not bac/e" b2 act#a! .one2 are hat in theA#strian tra"ition is ca!!e" &fi"#ciar2 .e"ia,% These fi"#ciar2 .e"ia .a/e the +eo+!e ho recei$e an"#se the. be!ie$e the2 on or contro! certain )oo"s hich the2 in fact "o not: i.a)inar2 )oo"s%>=

nflationary boom/ malinvestment an overconsumption

(ith the .one2 s#++!2 th#s inf!ate" b2 fi"#ciar2 .e"ia* actors in the econo.2 i!! +rocee" tocons#.e .ore than the2 otherise o#!" ha$e o$ercons#.+tion an" to in$est in "ifferent +!aces inthe str#ct#re of +ro"#ction than the2 otherise o#!" ha$e .a!in$est.ent% Fro. the )enera!+ers+ecti$e of the fra#" c2c!e* e can "escribe this +hase* hich is f#e!e" b2 fra#"#!ent!2 create"

i.a)inar2 )oo"s* as the inf!ationar2 boo.% Of co#rse* the inf!ationar2 boo. cannot !ast fore$er%L#"i) $on Mises e1+!ains h2:

& it is not +ossib!e to .a/e the boo. !ast fore$er beca#se the boo. is b#i!t #+on +a+er* onban/notes an" chec/boo/ .one2% It is base" on the ass#.+tion that there are .ore )oo"sa$ai!ab!e than there rea!!2 are%,

Phase II: Crisis

The i.a)inar2 )oo" cannot re.ain #n"isco$ere" as s#ch: one "a2 the tr#th i!! co.e o#t% Theine$itab!e crisis sets in hen a certain thresho!" of +eo+!e ca!! #+on their ban/ in or"er to ha$e it .eetits fi"#ciar2 "#ties% Often the initia! reason for this is not a s#""en !oss of confi"ence in the ban/s

tho#)h it .a2* b#t rather the fact that the stoc/ of rea! sa$in)s in the .ar/et +!ace has been "e+!ete"to s#ch an e1tent that it starts beco.in) a++arent in risin) +rices of ca+ita! an" cons#.er )oo"s%>

(hen it beco.es c!ear ho "iffic#!t it is for financia! instit#tions to .eet their ob!i)ations*+eo+!e start beco.in) s#s+icio#s% 5aret 5arrett "escribes it $i$i"!2* referrin) to the crisis fo!!oin) a"ebase.ent of a )o!" stan"ar" base" c#rrenc2:

&S#""en!2 "o#bt* then co.in) aa/e an" +anic% The s+irit of )o!" has been "ebase" b2sense!ess inf!ation% The faith is !ost% A!! ith one i.+#!se +eo+!e r#sh to seie the )o!" itse!f asthe on!2 rea!it2 !eft-not on!2 +eo+!e as in"i$i"#a!s G ban/s* a!so* an" the )reat ban/in) s2ste.san" )o$ern.ents "o it* in co.+etition ith +eo+!e% This is the financia! crisis%,>

The crisis is the .o.ent of aa/enin) an" +anic% The ne1t +hase of the b#siness c2c!e sets inhen +eo+!e start actin) on hat the2$e "isco$ere"%

>It is i.+ortant to note that the instit#tion of fractiona! reser$e ban/in)* hereb2 c#sto.ers are fa!se!2 !ea" tobe!ie$e the2 ha$e i..e"iate access to their "e.an" "e+osits* is inherent!2 in3#rio#s% It has been sai" that henfractiona! reser$e ban/in) is +ractice" &in .o"eration,* the "etri.enta! effects i!! not be that )reat* nor i!! the2beco.e i..e"iate!2 a++arent% Hoe$er* this is no )ro#n" to 3#stif2 the +racticeG stea!in) a tho#san" .onetar2 #nitsfro. a .i!!ionaire i!! a!so not !i/e!2 +ro"#ce )reat "a.a)e to the +erson* b#t that "oes not 3#stif2 the instit#tion ofstea!in)% One co#!" a!so ho!" that to"a2s ban/ers &/no of no better,% That is to so.e e1tent tr#e* fractiona! reser$eban/in) is co..on +ractice an" has been instit#tiona!ie" to a )reat e1tent% Hoe$er* that "oes not "etract fro. the"eceitf#! nat#re an" har.f#! effects of this +ractice* as the c#rrent state of the econo.2 tra)ica!!2 i!!#strates% A thiefho &/nos no better, is sti!! a thief%

>=Note that hereb2 it "oes not .atter essentia!!2 hether this ha++ens in the for. of ritin) o#t &circ#!ation

cre"it, cre"it .ere!2 base" on the tr#st in the ban/* not "irect!2 co$ere" b2 the ban/s assets or in the for. of .eree.be!e.ent of "e+osits% One co#!" i.a)ine a ban/ for e1a.+!e a centra! ban/ that rites o#t circ#!ation cre"ititho#t an2 act#a! assets at a!! to co$er it% This +ractice o#!" set in .otion a b#siness c2c!e% On the other han"* oneco#!" a!so i.a)ine a ban/ or financia! instit#tion the in$est.ent fir. of Bernar" Ma"off co.es to .in" hereb2!ent or "e+osite" .one2 is s2ste.atica!!2 e.be!e" on a !ar)e sca!e% A!so this o#!" !ea" to .a!in$est.ent*o$ercons#.+tion an" the ine$itab!e crisis an" recession in the econo.2%

>For a "etai!e" "isc#ssion of the "ifferent +hases of the b#siness c2c!e* see H#erta De SotosMoney/ )ank (reit/an *conomic (ycles* ++% ;>=K;5aret 5arrett*" )ubble %hat )roke the Worl* Boston: Litt!e* Bron* an" Co.+an2* 9;* +% 9>%

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Phase III: !eflationary Correction

In the +anic of the crisis* cons#.ers co!!ecti$e!2 ca!! #+on their ban/s to .eet their financia!ob!i)ations or fi"#ciar2 "#ties ban/ r#n* hich res#!ts in ban/ fai!#res% These cons#.ers i!!conse4#ent!2 chan)e their cons#.+tion +atterns* hich !ea"s to a +ainf#! rea"3#st.ent of thestr#ct#re of +ro"#ction "#rin) hich ca+ita! )oo"s are reKa!!ocate" fro. the sta)es far re.o$e" fro.cons#.+tion* toar"s the sta)es c!oser to cons#.+tion% The effect is i"es+rea" fai!#res in the

econo.2 an" te.+orar2 #ne.+!o2.ent% In a""ition* a "ef!ationar2 correction i!! ta/e +!ace in thefor. of a contraction of the fi"#ciar2 .one2 s#++!2% Trans!ate" in ter.s of the .ore )enera! fra#"c2c!e: an increasin) a.o#nt of fra#"#!ent +ractices are bein) #nco$ere"* an" as a conse4#ence* a"ef!ationar2 correction ta/es +!ace hich "i.inishes the s#++!2 of .a!a fi"e fi"#ciar2 to/ens fi"#ciar2.e"ia in circ#!ation% This contraction of the .one2 s#++!2* in t#rn* is in fact ho the "ef!ationar2correction of )oo"s* a .o$e fro. a s#++!2 fra#"#!ent!2 inf!ate" b2 i.a)inar2 )oo"s toar"s a s#++!2ri""en fro. these i.a)inar2 )oo"s* beco.es a++arent in the econo.2% The reco$er2 +hase of theb#siness c2c!e is set in .otion hen entre+rene#rs* no e.+oere" b2 a .ore rea!istic assess.ent oftheir .eans* start +ro$i"in) )oo"s an" ser$ices to .eet the rea"3#ste"* .ore rea!istic "e.an"s of theirfe!!o .en%

The fo!!oin) tab!e )i$es an o$er$ie of the .ost i.+ortant +ro+erties of the fra#" c2c!e an"their corres+on"in)* .ore s+ecific* +ro+erties of the b#siness c2c!e%

%able #7 (omparison Frau (ycle ; )usiness (ycle

Fraud Cycle %usiness Cycle

$eneral cause Fra#" Fra#"#!ent creation of.one2 tit!es fractiona!reser$e ban/in)

&ctors Tr#stor an" tr#stee De+ositor an" "e+ositar2

"elationship Tr#st Res#!tin) tr#st

'eans Ma!a fi"e fi"#ciar2 to/ens Fi"#ciar2 .e"ia

Cyclical effects Inf!ationar2 boo. ofi.a)inar2 )oo"s* +ossib!2acco.+anie" b2 a boo. infi"#ciar2 to/ens

Inf!ationar2 boo. offi"#ciar2 )oo"s*acco.+anie" b2 a boo. infi"#ciar2 .e"ia

Crisis: i.a)inar2 )oo"s areseen as s#ch%

Crisis: fi"#ciar2 .e"ia areseen as s#ch%

Def!ationar2 correction:.a!a fi"e fi"#ciar2 to/ensbeco.e $a!#e!ess

Def!ationar2 correction:contraction of the .one2s#++!2

Rea"3#st.ent ofcons#.+tion an" sa$in)+attern b2 the $icti.s

Rea"3#st.ent of thestr#ct#re of +ro"#ction* b2a shift in "e.an" fro. the+art of the cons#.ers

The $icti.s sa$in) an"in$est.ent +atterns

ret#rns to bein) .ore in!ine ith the s#++!2 of rea!)oo"s%

Restoration of thestr#ct#re of +ro"#ction* in

!ine ith the rea! )oo"s+resent in the .ar/et+!ace

Or"er is restore"rectification: in so far as+ossib!e* "a.a)es arere+aire" an" .eans ret#rn

Or"er is restore"rectification: the assets ofthe ban/r#+t ban/s areret#rne" to their ri)htf#!

9


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to their ri)htf#! oners-+eo+!e !i$e ithin their.eans a)ain

onersG ban/s sto+ ritin)o#t fi"#ciar2 .e"ia* an"beco.e f#!! reser$e ban/s

%he acceleration theorem

There is one .ore +ro+ert2 of the b#siness c2c!e e ha$e not "isc#sse" as of 2et% Here is the+!ace to "o so* beca#se it is $er2 .#ch re!ate" to the fra#" c2c!e% It is the +ro+ert2 hereb2* in or"er tos#stain the inf!ationar2 boo. an" to +ost+one the crisis* e$er .ore inf!ationar2 .eas#res .#st beta/en* !ea"in) to a acce!eratin) s+ira! of inf!ation* hich e$ent#a!!2 en"s in a .#ch .ore se$ere crisisthan otherise o#!" ha$e been the case%

This +rocess is hat 5aret 5arrett ca!!s the .echanis. of &cre"it "e!#sion,% Here is ho he"escribes its f#n"a.enta! ea/ness:

The fata! ea/ness of the sche.e is that 2o# cannot sto+% (hen ne cre"itors fai! to +resentthe.se!$es faster than the o!" cre"itors "e.an" to be +ai" off* the b#bb!e b#rsts%


21/24

An" so e see that* since one "eceit nee"s &.an2 others,* the on!2 action a sin"!er ho antsto a$oi" the tr#th fro. s#rfacin) i%e%* the crisis to hit can resort to* is f#rther "ece+tion%

Let #s no !oo/ a !itt!e c!oser at the .echanics of this +rocess: ho can fra#" be e1ten"e"@ At2+ica! an" first &ne fra#", to hi"e the initia! fra#" is the creation of a fi"#ciar2 to/en that foo!s the$icti. into tr#stin) the sin"!er .ore than he otherise o#!" ha$e% (ithin the conte1t of fractiona!reser$e ban/in)* e co#!" na.e the o+tion c!a#se* the +oo!in) of .one2 reser$es* "e+osit ins#rance

sche.es an" the estab!ish.ent of ne instit#tions s#ch as centra! ban/s as e1a.+!es of ho* in anatte.+t to hi"e the har.f#! conse4#ences of fractiona! reser$e ban/in)*% This +rocess is not s#stainab!e* as is in"icate" b2 H6!s.ann:

&Hoe$er* one .#st not o$er!oo/ that these effects are ca#se" b2 the +oo!in) of .one2* not b2

.one2 +oo!s as s#ch% The2 are .ere!2 te.+orar2% ?oo!in)* therefore* cannot a$oi" ban/ r#ns fore$er%Beca#se there are no )reater faci!ities to +ro$i"e !i4#i"it2 the ban/s i!! e1+an" their fi"#ciar2cre"its* th#s re"#cin) the reser$e ratio a)ain% On!2 for the ti.e nee"e" for this e1+ansion can the+oo!e" stoc/ of .one2 s#ffice to he!+ e$en the bi))est ban/s o#t of !i4#i"it2 +rob!e.s%, 5#i"oH6!s.ann* &Free Ban/in) an" the Free Ban/ers,* %he 3evie, of "ustrian *conomicso! * No% 99* +% >%


22/24

No )i$en that the h#.an i!! is free* e cannot +ost#!ate an in"o.itab!e e1terna! +rinci+!e thatco.+e!s +eo+!e to act in a2s that brin) abo#t b#siness c2c!esG i%e%* to co..it fra#"% This .eans the+heno.enon e are !oo/in) for i!! ha$e to inf!#ence the circ#.stances in hich +eo+!e .a/e theirchoices* in s#ch a a2 that the2 are then .ore !i/e!2 to .a/e certain choices o$er others% The socia!+heno.ena that estab!ish these !as* +ractices or c#sto.s* are hat e ca!! institutions%

An instit#tion can ta/e .an2 for.s* b#t its .ain f#nction is that it faci!itates* enco#ra)es* or

a"$ances the occ#rence of certain socia! +heno.ena% No hat "oes this .ean in the case of fra#"@Ho can fra#" be enco#ra)e" b2 instit#tions@ (e!!* )i$en that fra#" brin)s its on rear"s* it rea!!2"oes not nee" .#ch enco#ra)e.ent% Once certain e!!Kres+ecte" "ec!are this cri.e to be !e)iti.ate*then a!rea"2 its re+etition is )enera!!2 ass#re"% In s#ch a case* the fra#" c2c!e is bo#n" to rec#r o$eran" o$er a)ain% An" the .ore fra#" is !e)iti.ie"* i%e%* instit#tiona!ie"* the .ore the fra#" c2c!e i!!be seen to rec#r%

In the conte1t of the b#siness c2c!e* the instit#tiona! fra.eor/ s#++ortin) the fi"#ciar2 to/ensof the ban/s is co.+ose" of the centra! ban/ an" the )o$ern.ent%?@This is s#++orte" b2 historica!e$i"ence: in the s+here of .one2 an" ban/in)* e ha$e seen the officia! !e)iti.ation of fra#"#!entfi"#ciar2 to/ens increase o$er the cent#ries* reachin) a historic )!oba! hei)ht in the +erio" stretchin)fro. the ear!2 Jthcent#r2 to the +resent "a2% The first ste+ has been to instit#tiona!ie !e)a!iefra#"#!ent fractiona! reser$e ban/in)* the secon" to estab!ish centra! +!annin) a)encies ith a.ono+o!2 on the .int* that acti$e!2 an" !itera!!2 !en"s s#++ort to ban/s% An" ith this increase ininstit#tiona!iation* e ha$e in"ee" seen a +ara!!e! increase in the rec#rrence of the b#siness c2c!e% The.ost note" crises ha$e been the co!!a+se of the (ei.ar Re+#b!ic in 5er.an2* the 5reat De+ressionof the 9;Js* the Ar)entina h2+erinf!ationar2 "e+ression fro. 9=< onar"s* an" the c#rrent )!oba!econo.ic crisis%

(e can conc!#"e that the e1+!anation for h2 the b#siness c2c!e is a rec#rrent +heno.enon !iesin the fact that its )enera! ca#se* fra#"* has been instit#tiona!ie"% (e can no +#sh o#r )enera!e1+!anation a !itt!e c!oser toar"s a co.+rehensi$e "efinition b2 statin) that &the b#siness c2c!e is aninstit#tiona!ie" fra#" c2c!e that is +er$asi$e,%

7. (HYISTHEBUSINESSCYCLEA?ERASIE?HENOMENON@

After ha$in) e1+!aine" h2 the b#siness c2c!e is a c2c!ica! +heno.enon* an" h2 it is a!sorec#rrent* a!! that rests #s is to fin" )oo" reasons h2 the b#siness c2c!e is so $er2pervasive% (h2 is it*that econo.ic crises an" "e+ressions snoba!! so effort!ess!2 across )eo)ra+hica! bo#n"aries*thro#)ho#t socia! strata* #nti! the2 en" #+ e$en "e$astatin) entire continents@

(e /no b2 no that the )enera! ca#se of the b#siness c2c!e is fra#"* an" so it .#st be that

so.eho* the fra#" in$o!$e" in the b#siness c2c!e is of a /in" that .an2 +eo+!e are !i/e!2 to beconta.inate" b2% No* as e ha$e seen* the a2 the sin"!er con$inces his $icti. to enter into ane1chan)e ith hi.* is b2 .eans of fiuciary tokens* hich s2.bo!ie an a!!e)e" re!ationshi+ of tr#stbeteen hi. as tr#stor an" his $icti. bein) the tr#stee% (hether the sin"er s#ccee"s in hisatte.+te" fra#" "e+en"s on hether he .ana)es to con$ince his $icti. to buyhis fi"#ciar2 to/ens%An" so it fo!!os that the .ore a +artic#!ar /in" of fi"#ciar2 to/en is "esire" in societ2* the .oreeasi!2 i!! it be bo#)ht an" so!" f#rther% No the .ost sa!eab!e )oo" in an2 societ2* as e /no* ismoney% If +eo+!e can be .a"e to be!ie$e the2 are b#2in) fro. the sin"!er .one2* the )enera!!2

JAs M#rra2 Rothbar" rote:&A Centra! ban/ attains its co..an"in) +osition fro. its )o$ern.enta!!2 )ratne" monopoly of

the note issue% This is often the #ns#n) /e2 to the +oer of the centra! ban/ an instit#tionin$este" ith the .a3estic a#ra of the )o$ern.ent itse!f%, 4#ote" fro. his &(hat Has5o$ern.ent Done to O#r Mone2@,

An" Mises a)rees:

The )o$ern.ents a!one are res+onsib!e for the s+rea" of the s#+erstitio#s ae ith hich theco..on .an !oo/s #+on e$er2 bit of +a+er #+on hich the treas#r2 or a)encies hich itcontro!s ha$e +rinte" the .a)ica! or"s legal tener$

4#ote" fro. his &H#.an Action,


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acce+te" .e"i#. of e1chan)e* then in"ee" the inf!ationar2 boo. i!! be a +er$asi$e one%9This isa!so hat Ho++e* H6!s.ann an" B!oc/ obser$e in their artic!e &A)ainst Fi"#ciar2 Me"ia,:

XAs in e$er2 other case of co#nterfeitin) for)er2-of stoc/ an" co..o"it2 certificates*ban/notes* !an" tit!es* ori)ina! art* etc%*-i!! +h2sica!!2 "i.inish or "es+oi! the ori)ina! .one2-stoc/* co..o"it2* !an"* or art-oners +ro+ort2% B#t a co#nterfeiter of .one2 is +artic#!ar!2"an)ero#s an" in$asi$e beca#se .one2s "efinin) characteristic as the .ost easi!2 sa!eab!e an"i"e!2 acce+tab!e of a!! )oo"sG that is* beca#se moneyKco#nterfeits o+en to their se!!er the i"est+ossib!e ran)e of ob3ects for #n"#e a++ro+riation%%% %X

F#rther* it is i.+ortant to reco)nie the ro!e ban/s +!a2 in this +rocess% Ban/s are the +!aces inthe econo.2 here .one2 is bein) "ea!t ith the .ost: the2 /ee+ it safe* the2 borro it* the2 !en" ito#t% No actor in the econo.2 "ea!s .ore ith .one2 than the ban/er "oes% In this sense the ban/in)s2ste. is rea!!2 the .onetar2 heart of societ2G it is the +!ace here .ost of the .one2 f!os toar"sbefore it is +#.+e" to those +!aces in the econo.ic bo"2 here it is nee"e" as or"ere" b2 itsres+ecti$e oners% It is c!ear that if .onetar2 fra#" ere to ta/e +!ace ri)ht in that heart* that +!acethro#)h hich the .one2 f!os so ra+i"!2* that the tota! .one2 s#++!2 o#!" be corr#+te" faster thansho#!" the fra#" occ#r in an2 other +!ace in the econo.2% This beco.es c!ear if e contrast theco#nterfeitin) ban/ers ith a her.it co#nterfeiter* ho "oes not s+en" a +enn2 of the bo)#s .one2

he has +ro"#ce"-ob$io#s!2* the effects of the her.its co#nterfeit i!! not at a!! be i"es+rea"%(e can conc!#"e that the reason h2 the b#siness c2c!e has effects on a sca!e that s#r+asses

those of an2 other sort of fra#"* i%e%* h2 it is so pervasive* is first* that it in$o!$es the fra#"#!entiss#ance the .ost sa!eab!e )oo" in the econo.2-.one2-* an" secon"* that this fra#" is co..itte"in the +!aces here .ost .one2 is +oo!e" an" thro#)h hich .one2 f!os the .ost ra+i"!2-theban/s% ?#t brief!2* the explanation for ,hy the business cycle is such a pervasive phenomenon is that it is spa,ne inthe sphere of money an banking%

8. CONCLUSION

& !efinition of the %usiness Cycle

So then* e ha$e no ana!2e" the .ain characteristics of the b#siness c2c!e an" trace" the.bac/ to their ca#ses% These are the conc!#sions reache" so far:

There are three )enera! characteristics of the b#siness c2c!e #n"er hich a!! others can bes#bs#.e": cyclicality* recurrence* an"pervasiveness%

The )enera! e1+!anation of the b#siness c2c!e is that it fin"s its ori)ins in the si.+!e socia!+heno.enon of frauG the b#siness c2c!e is in essence a fra#" c2c!e%

The e1+!anation of the rec#rrence of the b#siness c2c!e is that its )enera! ca#se fra#" isinstitutionaliAeG the b#siness c2c!e is an instit#tiona!ie" fra#" c2c!e%

The e1+!anation of the +er$asi$eness of the b#siness c2c!e is that its )enera! ca#se fra#" issit#ate" in the s+here of money an bankingG the b#siness c2c!e is ca#se" b2 fra#" in the s+hereof .one2 an" ban/in)%

(e s#))est that the abo$e are a!! the b#i!"in) b!oc/s nee"e" to constr#ct a "efinition )en#s Ps+ecific "ifference of the b#siness c2c!e% The "efinition e s#))est r#ns th#s:

%he business cycle is an institutionaliAe frau cycle in the sphere of money an banking

9In the co#nterfact#a! sense of the or": .ore +er$asi$e than o#!" ha$e been the case if a !ess sa!eab!e )oo"ere to be #se" as fi"#ciar2 to/en% See Q[r) 5#i"o H6!s.ann* &Facts an" Co#nterfact#a!s in Econo.ic La,*Journal of 8ibertarian Stuies$o!% 9=* no% 9 (inter JJ;* ++% uarterlyJournal of "ustrian *conomics* $o!% 9* no% 9 9* +% ;;%

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Base" on this "efinition* a s#ccinct s+ecific e1+!anation of the b#siness c2c!e o#!" be that theb#siness c2c!e is ca#se" b2 instit#tiona!ie" fra#" in the s+here of .one2 an" ban/in)% This conc!#"eso#r atte.+t to "efine the b#siness c2c!e %

Some concluding thoughts

It is no c!ear that the +heno.enon of the b#siness c2c!e fin"s its ori)ins in a si.+!e act of

in3#stice:frau% In"ee"* it is fra#" that ca#ses #nise s+ec#!ation an" i"es+rea" .a!in$est.entsG fra#"that brin)s abo#t the +o$ert2* "isi!!#sion an" "es+air e a!! associate ith econo.ic crises%

In a +rocess s+annin) .an2 )enerations* this fra#" in the s+here of .one2 an" ban/in) hasbeco.e thoro#)h!2 instit#tiona!ie": in $irt#a!!2 e$er2 nation in the or!"* fractiona! reser$e ban/in)has o$er ti.e been "ec!are" !e)iti.ate% (hen in ti.es of econo.ic har"shi+ or socia! #nrest itbeca.e c!ear that fractiona! reser$e ban/s ere in fact not so!$ent at a!!* centra! ban/s ere estab!ishe"to ease this +rob!e. b2 .eans of .one2 certificates fi"#ciar2 to/ens +ro"#ce" o#t of thin air% Inthis a2* the e1istin) fra#" as e1ten"e" f#rther% B#t o$er ti.e* this a!!e)e" so!#tion a!so +ro$e"+rob!e.atic: in so.e co#ntries* +eo+!e starte" noticin) ho .#ch ne .one2 as +#t into circ#!atione$er2 2ear an" ho this !oere" the +#rchasin) +oer of their sa$in)s% In anser* the2 "eci"e" to se!!

their ban/ notes* hich !ea" to e$en .ore "e$a!#ation* #nti! at so.e +oint it beca.e c!ear that har"!2an2one tr#ste" the c#rrenc2 an" the centra! ban/ that iss#e" it% This as the scenario ofh2+erinf!ation% The !o)ica! reaction fro. the +art of the +eo+!e +rofitin) of the co#nterfeitin) sche.eas* +re"ictab!2* a f#rther e1tension of the fra#": centra! ban/s o#!" .a/e a)ree.ents to inf!ate inconcert* an" .ore tr#ste" fiat c#rrencies an" instit#tions ere #se" to inf!ate the confi"ence in !esstr#ste" fiat c#rrencies an" instit#tions% This !ea" to the estab!ish.ent of internationa! .onetar2instit#tions s#ch as the Internationa! Monetar2 F#n" an" the (or!" Ban/* an" to centra! ban/#nifications* s#ch as for e1a.+!e hat ha++ene" in E#ro+e ith the re+!ace.ent of the nationa!centra! ban/s b2 one E#ro+ean Centra! Ban/% This is the acce!eration theore. at or/: the on!2 a2 to/ee+ the sho )oin) is to e1ten" the e1istin) fra#" at an e$er faster +ace%

In the f#t#re* this tren" i!! contin#e: the +o!itica! an" .onetar2 forces of the or!"* "ee+!2in$este" in /ee+in) af!oat a fra#"#!ent s2ste. the co!!a+se of hich o#!" i+e o#t !ar)e .onetar2+rofits* "estro2 the re+#tation of the r#!in) c!ass tr#stees* an" cr#sh the s#++ort of $oters an""e+ositors tr#stors* i!! atte.+t to +#sh e1+ansion an" centra!iation to their !i.its% (e can e1+ectatte.+ts to f#rther inf!ate e1istin) b#bb!es* an" to ref!ate b#bb!es that ha$e a!rea"2 co!!a+se"% (e cane1+ect the estab!ish.ent of ne )o$ernin) an" .onetar2 instit#tions ith e1+ensi$e na.es an" !oft2.ission state.ents* instit#tions that are in fact nothin) .ore than ne c!othes for na/e" e.+erors%

E$ent#a!!2 hoe$er* the c#rrent crisis i!! )ain .o.ent#. an" a rea! "ef!ationar2 correction i!!set in% That i!! be the !on) 3o#rne2 toar"s a or!" that is roote" in rea!it2* ith the chance to b#i!"so#n" .onetar2 instit#tions s#ch as f#!! reser$e ban/s an" honest .one2% So hat can be "one tocontrib#te to this +rocess@ (e "ont ha$e the fina! anser to this 4#estion% Hoe$er* the .ora! ori)ins

of the b#siness c2c!e s#))est that its era"ication i!! a!so ha$e to be a .ora! 4#est% Fra#"* i%e%* "eceit!ea"in) to in3#stice* can on!2 be con4#ere" if re+!ace" b2 its o++osite: honest2 an" tr#thf#!ness* hich!ea"s to 3#stice% An" so e be!ie$e that ri""in) the or!" of the heino#s b#siness c2c!e is on!2 +ossib!eas +art of a !ar)er +ro3ect* that of stren)thenin) an" restorin) the 3#st societ2 b2 con"e.nin) "eceit*tric/er2 an" fa!se a++earances* b2 stan"in) for tr#th an" inte)rit2* an" b2 en)en"erin) )en#ine tr#st inre!ationshi+s ith others%

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The Business Cycle: A Definition