Introduction: Recurrent Cycles of Boom and Recession versus Isolated Crises Caused by Extraordinary Phenomena

Traditionally, Austrian theorists have focused with particular interest on the recurrent cycles of boom and recession that affect our economies and on studying the relationship between these cycles and certain characteristic modifications to the structure of capital-goods stages. Without a doubt, the Austrian theory of economic cycles is one of the most significant and sophisticated analytical contributions of the Austrian School. Its members have managed to explain how credit-expansion processes lead to systematic investment errors that result in an unsustainable productive structure. Such processes are advanced and orchestrated by central banks and implemented by the private-banking sector, which operates with a fractional reserve and creates money from nothing in the form of deposits, which it injects into the system via loans to companies and economic agents in the absence of a prior real increase in voluntary saving. The productive structure shifts artificially toward numerous projects which are too capital intensive and could mature only in a more distant future. Unfortunately, economic agents will be unable to complete these projects, because they are not willing to back them by sacrificing enough of their immediate consumption (in other words, by saving). Certain reversion processes inevitably follow and reveal the investment errors committed, along with the need to acknowledge them, abandon unsustainable projects, and restructure the economy by transferring productive factors (capital goods and labor) on a massive scale from where they were used in error to new, less ambitious but truly profitable projects. The recurrence of the cycle can be explained both by the essentially unstable nature of fractional-reserve banking as the main provider of money in the form of credit expansion and by the widespread inflationary bias of theorists, political authorities, economic and social agents, and above all, central bankers, who view economic prosperity as a goal to be pursued in the short term at all costs and see monetary and credit injections as a tool which cannot, under any circumstances, be dispensed with. Therefore, once recovery is well underway, sooner or later the authorities again succumb to old temptations, rationalize policies that have failed again and again, and reinitiate the whole process of expansion, crisis, and recession, and it all begins again.

Austrian economists have proposed the reforms necessary to end recurring cycles (basically, the elimination of central banks, the reprivatization of money – the classic pure gold standard – and making private banking subject to the general principles of private property law – that is, a 100-percent reserve requirement for demand deposits and equivalents). However, Austrians have always stipulated that these reforms would not avert isolated, non-recurring economic crises if, for instance, wars, serious political and social upheaval, natural catastrophes, or pandemics cause a large increase in uncertainty, sudden changes in the demand for money and, possibly, in the social rate of time preference. In such cases, the productive structure of capital-goods stages might even be permanently altered.

In this paper, we will analyze the extent to which a pandemic like the current one (and similar pandemics have struck a great many times in the history of mankind) can trigger these and other economic effects and the extent to which states’ coercive intervention can mitigate the negative effects of pandemics or, on the contrary, can become counterproductive, aggravate these effects, and make them last longer. First, we will study the possible impact of the pandemic on the economic structure. Second, we will consider the functioning of the spontaneous market order driven by the dynamic efficiency of free and creative entrepreneurship. In this scenario, entrepreneurs devote their attention, in a decentralized manner, to detecting the problems and challenges a pandemic poses. In contrast, we will analyze the impossibility of economic calculation and of the efficient allocation of resources when political attempts are made to impose decisions from above; that is, in a centralized way, using the systematic, coercive power of the state. In the third and final section of this paper, we will examine the specific case of massive intervention by governments and, especially, central banks in monetary and financial markets to deal with the pandemic by seeking to lessen its effects. We will focus also on simultaneous government policies involving taxes and an increase in public spending which are presented as the panacea and universal remedy for the evils that afflict us.