Why are there economic booms and busts, those long swings between expansion and slowdown? Traditional explanations focus on bad monetary policy. My research argues that they are usually structural, the result of powerful shifts in expectations about future productivity and profitability.
In the Interwar period, big swings were marked by hyper-inflations and deep deflations. Small wonder that for the Austrian, Keynesian and Monetarist schools it was always “cherchez la monnaie”. After World War II, however, long swings in economic activity continued, while only moderate price and inflation patterns emerged. In the 1960s, unemployment nearly disappeared in several European countries, but without rising inflation. In the 1990s, employment soared in several industrial countries, again with little or no inflation.
I see these powerful upswings as investment booms as having structural causes and effects. Entrepreneurs foresaw new opportunities for profitable use of capital in the medium-term future. So they stepped up investment in new facilities, new customers and new employees. Most business investing leads through non-monetary channels to higher employment – without inflationary over-heating.
The turn-of-the-century German school, led by Arthur Spiethoff and Gustav Cassel, viewed the pre-WWI booms in the same non-monetary way. They didn’t deny that “excesses” of speculation may arise. But they held that structural booms may die of natural causes – with no necessity for the over-building, purge and catharsis depicted by the later Austrian school.