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

Additional Considerations on the Theory of the Business Cycle 453recovery of economic activity. If wages are inflexible, hiringconditions very rigid, union power great and governmentssuccumb to the temptation of protectionism, then extremelyhigh unemployment can actually be maintained indefinitely,without any adjustment to new economic conditions on thepart of the original means of production. Under these circumstancesa cumulative process of contraction may also be triggered.By such a process the massive growth of unemploymentwould give rise to a widespread decrease in demand,which in turn would provoke new doses of unemployment,etc. Some theorists have used the term secondary depression torefer to this process, which does not arise from spontaneousmarket forces, but from coercive government intervention inlabor markets, products, and international trade. In someinstances, “secondary depression” theorists have consideredthe mere possibility of such a situation a prima facie argumentto justify government intervention, encouraging new creditexpansion and public spending. However the only effectivepolicy for avoiding a “secondary depression,” or for preventingthe severity of one, is to broadly liberalize markets andresist the temptation of credit expansion policies. Any policywhich tends to keep wages high and make markets rigidshould be abandoned. These policies would only make thereadjustment process longer and more painful, even to thepoint of making it politically unbearable. 51What should be done if, under certain circumstances, itappears politically “impossible” to take the measures necessaryto make labor markets flexible, abandon protectionismand promote the readjustment which is the prerequisite ofany recovery? This is an extremely intriguing question of51 Wilhelm Röpke, the chief “secondary depression” theorist, in his hesitantand at times contradictory treatment of the topic, acknowledgesthat in any case, in the absence of outside intervention or rigidity, spontaneousmarket forces prevent a “secondary depression” from hittingand developing. Even when the rigidity of labor markets and the implementationof protectionist policies causes such a depression and itdevelops, the market ultimately, invariably and spontaneously establishesa “floor” to the cumulative process of depression. See Röpke,Crises and Cycles, pp. 128–29.