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

By Frank Shostak

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.

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