Boom and Bust

The essentials for prosperity are everywhere and always the same: economic calculation and entrepreneurial planning augmented by a sound monetary institutional framework, a predictable legal framework that supports property rights and contract enforcement, and highly competitive resource markets.

If we are to better understand why the same policy that generates wealth to begin with is the best policy to follow in a crisis, one should begin with an understanding of the boom-bust process and more sound normative interpretation of the boom and bust.

The standard normative judgment about the phases of the cycle is that a period of booming economic activity is typically considered “good” while the downturn/recession/bust is “bad.” But it is the boom times that play host to the plague of malinvestments, overconsumption, and misdirected production. The bust brings readjustment and reestablishes the potential for sustainable growth. The standard normative judgment is backwards: it is the boom that is “bad,” and thus should be prevented or halted before it proceeds too far. It is the bust that, from a long-run perspective, is “good.” Past errors and misallocations of resources are discovered and, if markets are allowed to work, corrected.

via Return of the Dead Hand – John P. Cochran – Mises Institute .

What an insightful article! Note that two of the factors needed for prosperity (sound monetary framework and the legal framework) have recently come under some strain.

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