My new post at Mises Canada, which on Facebook I summarize as “Friedrich Hayek >> Scott Sumner.” An excerpt:
Now if Sumner’s explanation were the main thing going on, there would be two immediate implications: (1) Booms are good things. And (2) Booms should naturally slide back into normal growth as wages and prices adjust; there is no reason we should ever see a massive slump following a boom. Austrian economists sometimes chide their Keynesian foes for wanting “a perpetual boom,” but here Sumner is explicitly endorsing such a position too (whether or not he realizes it).
In the Austrian approach, on the other hand, there is no mystery here. The layperson’s intuition is right: A boom feels good because it really is a period with an above-normal standard of living, but it is genuinely unsustainable and it is bad. People come to realize at some point that the boom is illusory, and this realization leads not just to a return to normalcy, but a slump. How can we explain these facts? Because during the boom period,people unwittingly consume capital.
If a businessperson who owned a fleet of trucks suddenly stopped spending money on oil changes and didn’t get new brakes even for the vehicles that “needed” them, these decisions would boost (apparent) profitability in the short run. Not only would monetary expenses be reduced, but revenue would be higher, since the entire fleet could be out delivering cargo, rather than having some of the vehicles (at any given time) tied up in maintenance. Yet obviously this temporary boost in profitability would be a sham, with a disaster looming on the horizon.