Chapter 5: Booms, Recessions and Business Cycles
It has often been suggested to ‘stimulate’ economic activity and to ‘pump the prime’ by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future. Ludwig von Mises (1936, p. 463) Economic recessions come and go, but the persistence and extent of the Great Depression spawned much frantic activity by economists and politicians alike as they sought solutions to a downturn that left millions unemployed and susceptible to siren-calls from the extreme left and right. Some viewed the Depression as confirming Marx’s theory that capitalism would eventually implode. Others insisted that preserving political liberty in these conditions required radical curtailments of economic freedom. The Depression also stimulated discussion concerning whether it was possible to proactively address the fluctuations of investment, growth, employment and consumption that occurred in business cycles. Active contra-cyclical policies designed to smooth the boom–bust rollercoaster are often associated with Keynes. Some German economic liberals were, however, prepared to contemplate similar measures. Müller-Armack favored contra-cyclical monetary measures to take the heat out of a credit boom (1929, p. 665). Eucken thought that in times of very high unemployment, governments should subsidize labor costs, thereby encouraging businesses to hire more people (1952, p. 304). Röpke was writing...
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