Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Additional Considerations on the Theory of the Business Cycle 435true desire with regard to saving, to liquidate the investmentprojects undertaken in error and to massively transfer factorsof production toward the stages and companies closest to consumption,where consumers demand they be employed.Therefore the only possible and advisable policy in the case ofa crisis consists of making the economy as flexible as possible, particularlythe different factor markets, and especially the labormarket, so the adjustment can take place as quickly and withas little pain as possible. Hence the more rigid and controlledan economy is, the more prolonged and socially painful itsreadjustment will be. The errors and recession could even persistindefinitely, if it is institutionally impossible for economicagents to liquidate their projects and regroup their capitalgoods and factors of production more advantageously. Thusrigidity is the chief enemy of recovery and any policy aimed at mitigatingthe crisis and initiating and consolidating recovery as soon aspossible must center on the microeconomic goal of deregulating allfactor markets, particularly the labor market, as much as possible,and on making them as flexible as possible. 33This is the only measure advisable during the stage of economiccrisis and recession, and it is particularly important toavoid any policies which, to a greater or lesser extent, activelyhinder or prevent the necessary spontaneous process of readjustment.34 Also to be especially avoided are certain measures33 As Ludwig M. Lachmann indicates,[w]hat is needed is a policy which promotes the necessaryreadjustments. . . . Capital regrouping is thus the necessarycorrective for the maladjustment engendered by a strongboom. (Capital and its Structure, pp. 123 and 125)34 We agree with Murray N. Rothbard when he recommends that oncethe crisis erupts, the economy should be made as flexible as possibleand the scope and influence of the state with respect to the economicsystem be reduced at all levels. In this way not only is entrepreneurshipfostered in the sense that businessmen are encouraged to liquidateerroneous projects and appropriately redesign them, but a higher rateof social saving and investment is also promoted. According to Rothbard,Reducing taxes that bear most heavily on savings and investmentwill further lower social time preferences. Furthermore,