This collection of articles on the business cycle, money, and exchange rates by Ludwig von Mises appeared between 1919 and 1946. Here we have the evidence that the master economist foresaw and warned against the breakdown of the German mark, as well as the market crash of 1929 and the depression that followed. He presents his business cycle theory in its most elaborate form, applies it to the prevailing conditions, and discusses the policies that governments undertake that make recessions worse. He recommends a path for monetary reform that would eliminate business cycles as we have known them, and provide the basis for a sustainable prosperity.

In foreseeing the interwar economic breakdown, Mises was nearly alone among his contemporaries—which is particularly interesting because Mises made no claim to possessing clairvoyant powers. To him, economics is a qualitative discipline. But among those who say that economics must be quantitative with the goal of accurate prediction, neither the pre-monetarists of the Fisher School nor the Keynesians foresaw the economic damage that would result from central bank policies that manipulate the supply of money and credit. Why is this? Most economists were looking at the price level and growth rates as indicators of economic health. Mises’s theoretical insights led him to look more deeply, and to elucidate the impact of credit expansion on the entire structure of the capitalistic production process.

The essays were well known to contemporary German-speaking audiences. They had not come to the attention of English audiences until 1978, four years after F.A. Hayek had been awarded the Nobel Prize for, in particular, “his theory of business cycles and his conception of the effects of monetary and credit policies.” In tribute to Hayek’s excellent contributions, the Austrian theory of the business cycle has long been called a Hayekian theory. But it might be more justly called the Misesian theory, for it was Mises who first presented it in his 1912 book and elaborated it so fully in the essays presented herein.

Although the articles address issues that were debated many years ago, the analysis presented by Mises are as relevant today as they were in his time. Mises reached his conclusions regarding events of the day by means of a coherent theory, as applied to current events, rather than attempting to derive a theory from data alone, as many of his contemporaries did. This is what gave his writings their predictive power then, and it is what makes his writings fresh and relevant today. A proper economic theory such as Mises presents here applies in all times and places.

As in the past, most economists today believe that sophisticated mathematical and statistical methods can torture the data enough to reveal some causal link between events and yield a theory of inflation and the business cycle. But this is a senseless exercise. It is no more fruitful than a purely descriptive account and it has no more predictive value than a simple data extrapolation.

These essays have been buried in obscurity for far too long. Reading the writings of this great master economist might convince some economists and policy makers that there is no substitute for sound thinking. Economics is far too important a subject to be left in the hands of trend extrapolators, data torturers, and monetary central planners who rely on them.

Frank Shostak
Chief Economist
MAN Financial Australia
March 2006