Mises Agrees with Lachmann's Criticism: The ABCT Does Indeed Assume Elastic Expectations

In the thirty-one years which have passed since the first edition of my Theory of Money and Credit was published no tenable argument has been raised against the validity of what is commonly called the “Austrian” theory of the credit cycle. It was easy to prove that all objections brought forward were either futile or founded on a mistaken interpretation of the doctrine attacked.

However, some remarks made by Dr. L. M. Lachmann in his recent article “The Rôle of Expectations in Economics as a Social Science” deserve careful consideration. In this thoughtful essay the author contends that “the Wicksellian theory appears to be based on a very special assumption, viz., of a capital market without a very strong mind of its own, always ready to follow a lead on the spur of the moment, and easily led into mistaking an ephemeral phenomenon for a symptom of a change in the economic structure. Without fairly elastic expectations there can be no crisis of the Austro-Wicksellian type.” I fully agree with this statement with exception of the use of the term “elastic,” which I would rather avoid as it implies an inadequate and misleading mechanical metaphor; furthermore, I believe that the word “boom” should be substituted for the word “crisis.”

But I want to point out that I did not fail to state the fact that my explanation of the trade cycle is based on such an assumption. In my treatise Nationaloekonomie (Geneva, 1940) the chapter dealing with credit expansion ends with the following observation: “This typical course of the trade cycle has sometimes been altered through the interference of extraordinary events, mostly of a political character. But by and large one can observe in Great Britain since the end of the 18th century and in Western and Central Europe and in North America since the middle of the 19th century an almost regular alternation of booms and depressions. We may wonder whether the conditions which have had this result still prevail. The teachings of the monetary theory of the trade cycle are to-day so well known even outside of the circle of economists, that the naïve optimism which inspired the entrepreneurs in the boom periods has given way to a greater scepticism. It may be that business men will in future react to credit expansion in another manner than they did in the past. It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom. Some signs forebode such a change. But it is too early to make a positive statement.”

—Ludwig von Mises, “‘Elastic Expectations’ and the Austrian Theory of the Trade Cycle,” Economica, n.s., 10, no. 39 (August 1943): 251.