I understand that the current economic structure means recessions are unavoidable and the seeds of a recession are sown in the malinvestment of the boom phase of the business cycle. However, I am still relatively new to the Austrian school of economic thought and whilst I am convinced by it so far I have some questions: If recessions and the business cycle are inextricably linked then is it possible to have a recession free, business cycle free economy? And lastly if the Great Depression can be blamed on the expansion of credit not backed 100% by reserves, what is the explanation for recessions that happened under the 100% reerve banking era? Many thanks in anticipation of answers
shill22:If recessions and the business cycle are inextricably linked then is it possible to have a recession free, business cycle free economy?
Yes. But keep in mind that a recession can be caused by other things, such as a massive earthquake.
Welcome!
Schools are labour camps.
eliotn: shill22:If recessions and the business cycle are inextricably linked then is it possible to have a recession free, business cycle free economy? Yes. But keep in mind that a recession can be caused by other things, such as a massive earthquake. Welcome!
That's a shock, not a recession.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
GilesStratton:That's a shock, not a recession.
Wait, how do you know this?
he's right an earthquake is a shock, that can conceivably cause a recession.
by making what previously appeared to be worthy investments, a loss, they are revealed to have been malinvestment. etc.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
eliotn: GilesStratton:That's a shock, not a recession. Wait, how do you know this?
Because without a boom there cannot be a recession, where's the boom in this case?
In a free market, the economy is termed as being either a progressing economy or retrogressing economy. In a progressing economy, the time preference of individuals continually decline which means continually higher savings and investment which leads to a lengthier structure of production. Real wages increase from increasing DMVP while prices of consumer goods fall due to increased production.
In a retrogressing economy, the opposite is true is every case. A retrogressing economy would feel similiar recession except that, in a free market, there would be little to no increase in unemployment due to flexible wages. In other words, everyone would still be employed, but their wages would decline as a result of lower DMVP due to lower investment due to lower savings due to higher time preferences.
In a free market, a retrogressing economy comes about by the choices of individuals and their value scales. This makes it neither a good thing or bad thing. since a retrogressing economy comes about because of the time preferences of individuals. Individuals choose to consume more in the present rather than save and invest in the future.
Any event that causes higher time preferences would lead to a retrogressing economy. Some possibilities include an expectation that a catastrophic event will occur soon or even possibly a cultural shift to materialism which convinces enough people to consume rather than save.
As for your second question, even under a gold standard, many banks in the 1800s fraudulently created more depository slips than they had gold. This lead to credit expansion which was most often stopped by bank runs. A 100% reserve does not guarantee that some banks will not commit fraud and issue more receipts than they have gold. The free market solution is a run on the bank which promptly ends any further credit expansion and leads to the bankruptcy of offending banks.