America's Great Depression - Chapter 1

Business fluctuations refer to the ups and downs in economic activity, such as changes in production, employment, and income levels. These fluctuations are a natural part of the business cycle and are influenced by various factors, including changes in consumer spending, investment, government policies, and external shocks. Economic theory provides explanations for these fluctuations, as it helps us understand how changes in aggregate demand and supply, monetary and fiscal policies, and other economic variables impact business activity. Therefore, fluctuations in business are fully explained by economic theory.

Lowering the government's relative role in the economy during a depression can be a positive step because it allows the private sector to take a larger role in driving economic growth. By reducing regulations and government intervention, businesses have more freedom to innovate, invest, and create jobs. This can lead to increased productivity and economic activity, helping to lift the economy out of a depression. Additionally, reducing the government's role can also help to reduce the burden on taxpayers and prevent excessive government spending, which can contribute to economic instability.

Credit contraction following a period of credit expansion speeds up the market's adjustment process. During a period of credit expansion, there is an increase in borrowing and lending, leading to excessive credit in the market. This can result in asset price bubbles and unsustainable economic growth. When credit contraction occurs, it reduces the availability of credit, leading to a decrease in borrowing and lending. This helps to correct the imbalances in the market, deflate asset price bubbles, and allow the economy to adjust to more sustainable levels. Therefore, credit contraction speeds up the market's adjustment process.

The Austrian explanation for the perpetual recurrence of business cycles is that banks and governments inflate credit when they can. This means that they increase the supply of money in the economy, leading to an expansion of credit and investment. However, this expansion is unsustainable and eventually leads to a bust or recession. The Austrian school of economics argues that this boom-bust cycle is caused by the manipulation of the money supply by central banks and governments, rather than by external factors such as seasonal fluctuations or the increasing marginal utility of investment goods.

Bank credit inflation can cause otherwise rational businessmen to invest too much in higher-order capital goods. When there is an increase in bank credit, it leads to an expansion of the money supply, which lowers interest rates. Lower interest rates make borrowing cheaper and more attractive, encouraging businessmen to take on more debt to invest in capital goods. This can create a situation where there is an oversupply of higher-order capital goods, as businessmen may overestimate the demand for these goods due to the artificially low interest rates.

Time preferences refer to an individual's inclination towards either immediate or delayed consumption or investment. It determines the proportion of their income that they choose to save or invest instead of spending it. People with high time preferences tend to prioritize immediate consumption, while those with low time preferences prioritize saving or investment for the future. Therefore, time preferences directly influence an individual's consumption-to-saving or investment ratio.

The Austrian theory of the trade cycle suggests that overinvestment and the assumption of full employment are two common misconceptions. Overinvestment refers to the belief that excessive investments in certain sectors of the economy can lead to economic instability and eventual downturns. The assumption of full employment implies that the economy is always operating at its maximum potential, which is not always the case. These misconceptions can lead to flawed policies and decision-making, hindering economic growth and stability.

A theory of depression must explain the main problem of why there is a sudden general cluster of business errors. This is because depression often leads to a decline in economic activity and can cause businesses to make mistakes or poor decisions, resulting in a cluster of errors. Understanding why this occurs is crucial for developing effective strategies to prevent or mitigate the negative impacts of depression on businesses and the economy as a whole.

The correct answer is Mises and Schumpeter. Cycle theory, also known as business cycle theory, has been integrated into the general economics theories by Ludwig von Mises and Joseph Schumpeter. Mises developed the Austrian business cycle theory, which explains how fluctuations in the economy are caused by the expansion and contraction of credit. Schumpeter, on the other hand, focused on the role of innovation and entrepreneurship in driving economic cycles. Both economists made significant contributions to our understanding of business cycles and their integration into general economics theories.

According to Rothbard, the deflationary bust is not a phase of the business cycle set into motion by bank credit expansion. This means that when there is a contraction in the economy and a decrease in prices, it is not a result of bank credit expansion but rather other factors. The inflationary boom, crisis, and depression recovery are all phases that can be triggered by bank credit expansion, but the deflationary bust is not.