13. The "Manic-Depressive" Economy: The Dampening of the Entrepreneurial Spirit and Other Negative Effects Recurring Business Cycles Exert on the Market Economy

The economic crises credit expansion repeatedly provokes lead to other consequences which are more subtle, yet no less damaging to the harmonious cooperation among people and to their economic and social development.⁵⁴ Specifically it is necessary to highlight the way in which the current monetary system, based on credit expansion, has made it customary for booms and crises to disturb economic development. In other words, it appears as if “manic-depressive” behavior were required of a market economy.

Indeed businessmen, journalists, politicians, union members, and economic agents in general have come to consider the artificial expansionary phase characteristic of a boom to be the normal stage of prosperity, which should be sought and maintained in any way possible. By the same token, expansion's inevitable consequences, i.e., crisis and recession, are considered a very negative stage which should be avoided at all costs.⁵⁵ Economic agents do not recognize the recession as the inevitable result of artificial expansion, and they fail to realize it has the virtue of revealing the errors committed and facilitating the recovery and readjustment of the productive structure.

Furthermore credit expansion excessively and unjustifiably forces economic agents’ reflexes and the pace at which they work. While the expansion lasts, people's capacity for work is pushed to the limit and their entrepreneurial spirit becomes corrupted. Psychological stress and wear follow and are of high human and personal cost. Moreover the new money created via the expansionary granting of loans is used to finance all sorts of speculative operations, takeover bids and financial and trade wars in which the culture of shortsighted speculation prevails. In other words the misconceived idea that it is possible and desirable to accumulate astronomical profits with astonishing ease and swiftness spreads. This discourages the traditional entrepreneurial spirit and a job well done, both of which are based on prudent business management with an attitude of constancy and commitment to the achievement of long-term goals. This is what we have in mind when we refer to the widespread demoralization caused by artificial credit expansion. This discouragement is especially devastating to society's youngest, most dynamic generations.⁵⁶

The problem is made worse if, as theorists who have analyzed the cycle from a political standpoint have shown,⁵⁷ politicians make their decisions entirely on a short-term basis and with the aim of attaining immediate support to guarantee them victory in the next election, and therefore they never hesitate to advocate and initiate those policies of monetary expansion which will most help them achieve electoral success in the short run. Furthermore as any deviation from artificial expansion and the excessive optimism it produces is viewed unfavorably, immediately attacked by the media and used as a political weapon to be hurled by the opposition, unions and business organizations, no one dares to condemn the evils of the credit policy. This creates an environment of monetary irresponsibility which tends to aggravate problems and makes it highly unlikely they will be resolved through a sensible readjustment and liquidation which lay the foundations for a sustained recovery that does not depend on credit expansion.

The recurrent economic crises credit expansion provokes exert another very destructive effect on market economies and the principles of freedom of enterprise. Indeed each expansion process is invariably followed by a painful stage of readjustment, which is the ideal breeding ground for justifications of subsequent state intervention in the economy and for popular arguments that it is precisely the economic recession which reveals the inadequacies of a market economy and “proves” the necessity for the state to intervene more in the economy at all levels to mitigate the consequences of the recession and prevent further crises. Thus the recession provides a favorable environment for the resurgence of proposals of trade protectionism, market intervention, increases in the government budget deficit, and regulation of the economy. As we know, these interventionist policies only serve to prolong and aggravate the recession, and to hamper the necessary recovery. Sadly, the timid beginnings of the recovery are accompanied by such public pressure in favor of new credit expansion that expansion begins again and the entire process is repeated. As Mises eloquently concludes: “But the worst is that people are incorrigible. After a few years they embark anew upon credit expansion, and the old story repeats itself.”⁵⁸