I had a long and drawn out discussion with two friends over whether recession could occur without the existence of government. Their main situations were:
(a) Natural disaster or terrorist attack
(b) Entrepreneurs in general mostly fail to anticipate consumer preferences correctly
I argued that (a) was possible in principle and (b) was possible, but very unlikely.
I would be grateful for any input I could receive on this.
There would still be speculative bubbles like the Dutch tulip bulb mania, Ponzi schemes like Bernie Madoff’s, etc., which would bring economic contraction once everybody realized the fundamentals weren’t there but the effects would be localized. And there wouldn’t be a bunch of funny money being printed up and fed to the bubble to let it get that big in the first place. People get carried away with decisions that look stupid in retrospect all the time: dot-coms, day trading, tulip bulbs, the lotto, etc. Again, in the absence of bank-created money and a government printing press, the bubble never gets that big.
Also, I get the idea that people don’t really understand the nature of recessions. There is no “cure” for a recession. The recession IS the cure.
Surely, some entrepreneurs would be terrible at anticipating such preferances; however, those are the type who fail at their businesses rather quickly and go into another line of work. The entrepreneurs who are deft at anticipating consumer preferances will be those who rises to the top and those who wield the most power. Its an argument, that if correctly reasoned, defeats itself.
Yes, if fractional reserve banking practises continued, we would continue to be plagued by recessions.
That depends on our understanding of recession. If we define recession as a sudden shock to demand that requires a reorganization of the production structure of the economy, then (a) is possible but (b) is not. In the case of (a) however the recession is a positive and necessary event.
Recessions are good if we understand that the purpose of an economy is to create wealth. In a recession wealth-destroying industries are eliminated.
Even supposing that a free society did not practice fractional reserve banking, if it was engaged in trade with non-free societies then it would suffer the shocks in demand that fractional reserve collapse would bring about.
b) is particularly apt in new markets. Part of the problems with the current crises is that investors didn’t know how to handle information in the newly credit derivative markets.
I was under the impression that FRB was near-impossible in a free market (Mystery of Banking).
That’s as may be, but it would be far more obvious that a bubble was occurring without the inflation which effectively disguised problems.
I know this, and that is why I argued it was very unlikely. But is it not possible that all entrepreneurs could suddenly misinterpret future consumer preferences?
i agree, but speculative bubbles will always be a problem in markets. This has been shown experimentally (in the absence of a central bank) as a part of human nature.
Indeed, it’s the reason why a central bank was created in the first place.
While a central bank does, ultimately, increase the volatility of bubbles, I think it extends the natural “limitation” of the free market (that shouldn’t be tampered with, though).
I read that around 80% of buiness ventures end in failure:
source: http://www.alibris.com/booksearch.detail?S=R&bid=8135939996&cm_mmc=shopcompare-_-base-_-aisbn-_-na
I was under the impression that there were no major cycles (in the US) until the one that ended in the panic of 1819?
It may simply be the case that the data isn’t available for periods before then?
http://www.nber.org/cycles.html ← take that as you will.
It’s certainly not sustainable, but that isn’t to say that it can’t be attempted once a bank has gained a decent reputation and gives into the temptation to misappropriate funds.
But yes, you’re more of less correct it’s not sustainable, hence central banks.
along those lines, I’d like to see economic data during 1837-1862 when there was no central bank (US) and no major banking laws on the books.
Austrian School actually made a report on the crisis of 1837 here: http://mises.org/journals/scholar/trask1.pdf
thanks
Big state regulation and support for banks though…