Der Apriorist - Abstracts 06. Oct. 2010

Capital, Monetary Calculation and the Trade Cycle: The Importance of Sound Money

by John P. Cochran

Tags: money, business cycle theory
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John P. Cochran. Capital, Monetary Calculation and the Trade Cycle: The Importance of Sound Money. Quarterly Journal of Austrian Economics 7.1 (2004).

Quotes: Government control/intervention into the money system creates distortions in the money pricing system. These interventions lead to money prices that are not based on individual valuations and knowledge. Calculation errors will be in excess of entrepreneurial errors that are normal when planning for future provision of consumers’ wants in the face of unavoidable uncertainty. Planning to meet consumers’ most urgent demands is hindered, and in the case of a crack-up boom where no substitute money is readily available, so shortened in time horizon as to be effectively eliminated.

The arguments supporting a sound money policy were originally extensions of the Austrian business cycle theory. Credit creation systematically undermines capital-based entrepreneurial plans by increasing the difficulty associated “with the relationships between resources at one point of time and outputs of subsequent points of time” (Kirzner 1996, p. 43). The crisis or bust following a boom is just a calculation meltdown cut short. The intervention is stopped or slowed and the falsified calculations are revealed. The corrective action of profit/loss feedback begins again to assert itself. Economic activity “recovers,” as the market again begins a process to align business plans with consumers’/producers’ valuations and available resources. If the intervention is not slowed or stopped, the inflation continues until a crack-up boom sets in with the associated complete calculation breakdown.

Sound money provides a financial environment where economic crisis associated with misdirections of resources and malinvestments can be avoided and where monetary calculation can be as efficient as possible. Economists who accept the Austrian argument on the impossibility of rational economic calculation in a socialist economy and recognize the calculation problems inherent in highly interventionist economies, but reject Austrian business cycle theory, should re-examine their position. The key elements for understanding the market process based on entrepreneurial planning, monetary calculation, and capital are the key elements underlying both the calculation argument and Austrian business cycle theory. Without sound money, calculation is less efficient and the economy will be prone to business cycles. With sound money, no boom-bust cycle will emerge and monetary calculation and planning will be as efficient as possible in an uncertain world.

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