The market, of course, also has a discovery process to eliminate all sources of sub-optimal performance (including deceit), but this latter process is typically slower than the former.

As a side note, if you look at recent history, the diversity of deceit methods in a single crash has been reducing. Compare the wide variety of creative accounting methods used in the 1980′s to the very debt specific method in the current crash. I haven’t been able to decide whether this is due to:

a) possible competition between methods prior to the crash (“best lie wins”), or

b) we are running out of new deceit methods (do we have “peak lies” as well as “peak oil”?)

Distortions can take a long time to flow through to an impact on the supply at the consumer end of the bargain which is why I think using a consumer basket as the main measure of inflation creates a deeply flawed monetary feedback mechanism.

To get to the ABCT you only need to add one more factor, and that is to recognise that the real impacts are different in different sectors of the economy. So we don’t just have “over-investment”, but the price signals are temporarily changed and we have “mal-investment”.

I agree that this would be true of all monetary systems.

The first part is accepted by most monetary economists, including the monetarists (which is why monetary policy can be effective in the real economy short-term).

And the second part (which not included in monetarist or keynesian analysis) is self-evident. This is the part of the story where mal-investment (instead of simply over-investment) comes in… which requires capital to be later re-allocated (with the associated “creative destruction”).

Hopefully, the free market will learn (and learning is its mainh strength) and alter its approach, possibly from a system based on ratings agencies to one based on insurance. My fear is that the moral hazard of government responses to the crisis will mean it never will.

It would have been better, if, instead of these billion dollar bailouts, central banks simply sold insurance to underwrite securities (at as fair a price as their economists can work out for each security). These government suppliers would acquire private competitors over time, and governments could exit from the crisis with minimal damage later on.

To get a general business cycle out of this process, these timing errors would need to be correlated, which is equivalent to saying that the credit cycle induces systematic error over and above normal entrpreneurial error.

Here is another possible response in reference to a similar quote of Mises:

“Nevertheless, for reasons supplied in the main text, this augural presentation Mises made in 1949 of the hypothesis of rational expectations is not entirely justified, considering that even when entrepreneurs have a perfect understanding of the theory of the cycle and wish to avoid being trapped by it, they will always continue to be tempted to participate in it by the excellent profits they can bring in if they are perceptive enough to withdraw in time from the corresponding investment projects.”

Jesus Huerto De Soto: Money, Bank Credit & Economic Cycles, 1998

http://www.debtdeflation.com/blogs/2008/12/13/the-worlds-biggest-ponzi-scheme/