Monday, January 8, 2018

Would There Be Natural Boom-Bust Cycles in a Free Market Economy Without a Central Bank?

I thought boom-bust cycles DO (would) occur naturally in a free-market, except on a much smaller and less extreme scale? Since even in a free-market there would still be at least some small amount of misallocation of capital (imperfect knowledge), and so, periodic adjustments (the bust cycle) would still be necessary. Or maybe I'm incorrect, in that the adjustments---the reallocation of capital---would be constantly occurring in the aggregate, and not occur en masse as in our current world, and as such would not be noticeable---? 
It is not that entrepreneurs won't make any errors in a free market economy but they won't be what Murray Rothbard called a "cluster of errors" of the type you see during a central bank created boom-bust. It is the seeming all-encompassing downturn that is the hallmark of a central bank created business cycle.

There might be an entrepreneur here and one there that make errors but not the en masse errors of entrepreneurs during a bust.

For Rothbard's detailed discussion on this, see: Austrian School Business Cycle Theory by Murray Rothbard.


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