Reply To: Selgin vs. Solerno Debate


The asymmetry of the boom compared to the bust has little to do with the difference in upward and downward flexibility of prices. The boom begins with monetary inflation and credit expansion which generates capital funding to be invested. The additional money can be allocated into any production process in the economy since money is completely liquid. The capital funding, then, gets converted into capital goods which results in the building up and lengthening out of the capital structure. The bust begins with the malinvested capital structure. Since capital goods are somewhat specific, they cannot as easily as money be shifted into other production processes with their full monetary value intact. As long as the government does not interfere with the liquidation and reallocation process, however, it can proceed apace (even in the face of the necessity to convert the uses of specific capital goods) as it did in the downturn of 1920-1921.