Every Explanation of Economic Crises MUST Include the Assumption that Entrepreneurs Have Committed Errors

Every explanation of economic crises must include the assumption that entrepreneurs have committed errors. But the mere fact that entrepreneurs do make errors can hardly be regarded as a sufficient explanation of crises. Erroneous dispositions which lead to losses all round will appear probable only if we can show why entrepreneurs should all simultaneously make mistakes in the same direction. The explanation that this is just due to a kind of psychological infection or that for any other reason most entrepreneurs should commit the same avoidable errors of judgment does not carry much conviction. It seems, however, more likely that they may all be equally misled by following guides or symptoms which as a rule prove reliable. Or, speaking more concretely, it may be that the prices existing when they made their decisions and on which they had to base their views about the future have created expectations which must necessarily be disappointed. In this case we might have to distinguish between what we may call justified errors, caused by the price system, and sheer errors about the course of external events. Although I have no time to discuss this further, I may mention that there is probably a close connection between this distinction and the traditional distinction between ‘endogenous’ and ‘exogenous’ theories of the trade cycle.

—F. A. Hayek, “Price Expectations, Monetary Disturbances, and Malinvestments,” in The Collected Works of F. A. Hayek, vol. 5, Good Money, Part I: The New World, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 235-236.