Like with the collapse of the Big 3. Tons of people become unemployed and thus have less money to spend on goods, which cuts into the profits of other companies, forcing them to lay off more people, etc.
Is there something obvious I’m missing? I’m relatively new to Austrian Economics, so please excuse me if this is a retarded question. 
I would not suggest that I have the answer to this question but what might happen in an unhampered economy is that falling prices could offset the fall in nominal incomes leading to no overall fall in real aggregate income.
However, in a recession, not all incomes are falling and those that are are falling at different rates. I suppose the ideal is that the malinvestments will be hit hardest and be liquidated, freeing up real capital for reinvestment. The increasing accumulation of capital eventually enables the recession to be reversed and growth to resume.
Nothing will stop the vicious cycle. All to often, The State via either legislation, executive authority, baillouts, central banking, etc., will attempt to intervene. The BOOM is the crisis. The BUST is the correction (aka Recession).
Doing NOTHING and letting the market work out the adjustments is the best solution.
http://freemmm.blogspot.com/2008/10/boom-was-financial-crisis.html
Also, take a look on Mises for ABCT, Austrian Business Cycle Theory.
In other words, let the Big 3 fail, there will be people willing to pick up the pieces, once they find value in it.
yes there is something you’re missing that a lot of keynesians also miss. as demand falls, producers have to lower pricers in order to attract more demand. some of these companies will lay off their workers to make these prices profitable, while others will lower wages. according to marginal utility, this decrease in demand will divert capital from the subjectively least valuable factors of production. if a company cannot lower prices and/or make a profit, they will go bankrupt and the more productive businesses will bid for their assets.
the result is that consumers and businesses that see the smallest dent in savings or profits have more purchasing power to take advantage of both the lower prices and the abundant labor supply. in effect, labor and resources are redirected to the most productive businesses.
as profits in these companies increase, companies will try to expand and hire more. this increases demand for labor, raising wages to compete with other sectors for labor. these wage raises either increase the employed savings or spending. The increased spending encourages those with increased savings to start up companies to produce new goods that consumers want with their new money. This further reduces unemployment, and wages are raise even more to compete for the shrinking labor supply.
There is no unemployment in a free market.
In a sense that is true. There certainly isn’t any “involuntary” unemployment.
People will still be laid off in a free market. Globalization frees up capital so that people here may lose factory jobs to China, but that will allow them to take higher paying skill and service jobs. However, that doesn’t mean they have the education to take such a job. As a result, unemployment due to globalization/off shoring, credit crunches are very real.
That means they have to get the education, now doesn’t it? Or slash their wage demands… I don’t know what credit crunches have to do with it, considering we’re discussing free markets, not ones with systemic boom-bust cycles.
Those unemployed people are already unemployed 12-16 hrs/day, 5 days a week and 24 hrs/day, 2 days a week. How do we survive during those bleak hours?