The “Cause of the Crisis” that Must Not Be Named

by Thorsten Polleit


The truth can be uncomfortable. And it can be so scary that you don’t want to speak or hear about it. Like in Harry Potter, where nobody dares to utter the name of the evil wizard Voldemort. Witches and wizards refer to him as “He Who Must Not Be Named” instead. Perhaps a telling analogy, as many economists refuse to speak openly and truthfully about the root causes of financial and economic crises.

Let’s ask: What caused the most recent turbulences in the international banking market in March 2023? What caused the global financial and economic crisis of 2008/2009? What caused the “New Economy Hype” to burst in 2000/2001? If you ask economists these (and other economic and financial crisis-related) questions, you will probably hear an entire range of different answers of the following type:

For instance, that investors were too greedy; that there was too much speculation, risk appetite and “moral hazard”; that hedge funds have gone wild; that banks were too poorly regulated; that monetary and fiscal policymakers failed (that they have done too much (or too little and/or had bad timing); that the free market system failed; that capitalism will inevitably end in disaster; etc.

Established economists hardly ever mention central banking, the issuance of unbacked money (or fiat money) through the creation of bank credit and “fractional reserve” banking, as the source of major financial and economic crises. Hardly anyone is blaming the government’s monopolization of money production as the root cause for boom and bust cycles, for recurring debacles in the financial and economic system.

This is not too surprising, as it has become common practice to use observations (experience) as the source of scientific knowledge in “modern” economics and as a means of validating the truth value of theories on the basis of observations made. It is the direct result of applying a specific method of gaining knowledge about reality based on the ideas of positivism-empiricism-falsificationism.

Positivism is an (ideological) doctrine that states that all scientific knowledge can only come from measuring real-world phenomena. Empiricism holds that experience is the only source of scientific knowledge. And falsification (a term closely related to Karl R. Popper (1902–1994)) teaches that we can never verify a proposition, that all we can hope for is to not falsify it for the time being, but that we can never be sure whether we have obtained true knowledge.

The scientific method based on positivism-empiricism-falsificationism is pursued in the natural sciences, and quite successfully so (just look at the scientific advances in this field in the last, say, 70 years). However, it is entirely out of place and cannot be applied without causing logical contradictions in the realm of economics – which is a part of the science of human action. Why is this so? This all-important question deserves a detailed answer.


Natural science mostly deals with with inanimate objects – molecules, rocks, and planets –, things that have no goals or preferences, which do not choose between alternative modes of action. Humans, on the other hand, are categorically different. Because humans act, they have goals and preferences and choose among alternative courses of action. The important insight is that “humans act”.

The proposition that humans act may sound trivial, but, epistemologically speaking, it is not. Because the statement “humans act” cannot be denied without causing a logical contradiction. When you say, “humans do not and cannot act”, you are acting – and denying what you just said, causing a logical contradiction, thus stating something false. The proposition “humans act” is a priori true: its truth value cannot be denied without presupposing its validity.

From this, we can deduce that there are no (quantitative) constants in human action; there is – in sharp contrast to natural science – no “If A, then B” or “If A increases by x per cent, then B changes by y per cent”. Because in contrast to observations made in a laboratory experiment, every human action is unique. Human action takes place under certain conditions at particular times. Human action is a non-repeatable event, not comparable with any other human action at any other time. Why?

Humans have the capacity to learn (Lernfähigkeit), something we cannot deny without creating a logical contradiction (thus saying something false). When claiming “Humans cannot learn”, you presuppose that humans can learn (otherwise, you would not be saying what you just said) and are provoking a performative contradiction. And when you say, “Humans can learn not to learn”, you create an open contradiction because you deny what you just said.

The proposition that humans have the ability to learn is a priori true. And if we cannot deny that humans have the capacity to learn, we must conclude that peoples’ knowledge – which is what ultimately drives their actions – changes over time. This, in turn, means that we cannot know an actor’s future knowledge and thus his/her actions in the present. Because if we could, we would assume, at least as far as the future is concerned, that people would no longer be able to learn. However, this would be a logical contradiction.

We conclude that people have the capacity to learn that their knowledge changes over time, and, therefore, we cannot sustain the notion that there might be behavioural constants (or: quantitative regularities) in the field of human action. If humans have the capacity to learn, we simply cannot claim that humans respond to a given stimulus in a consistent way.

Therefore, the scientific method used in natural sciences cannot be applied to the field of human action. If you apply methods of natural science in economics, you risk arriving at the wrong results. For instance, you might diagnose behavioural constants where none exist, overlook or deny existing causal relations between economic variables, and produce false predictions and policy recommendations.

In contrast, the logic of human action makes us understand the qualitative consequences of certain modes of action; provides a priori explanations of economic phenomena like money, credit, time preference, the originary interest rate etc.; reveals the effects government interventions in the free market system entail. All of which becomes understandable through logical deductions from the a priori of human action.


Applying the scientific method of human action to economics, we can fully understand the impact the issuance of new money through the expansion of bank circulation credit (that is, credit not backed by real savings) has on overall economic developments – something that cannot be understood if the analysis is limited to collecting and interpreting data; in fact, something that may be even swept under the rug.

First, the increase in bank credit is lowering the market interest rate below what it would be had there been no such bank credit expansion. Suppressed market interest rates, in turn, make people save less, consume more, and increase their investment demand, leading to the economy living beyond its means. The increase in the fiat money supply created through bank credit expansion initially leads to a boom.

However, the boom must turn into a bust. Why? The boom, during which the market interest  rate is artificially suppressed, makes people save less, consume more, and demand resources for additional investments. This implies that the boom leads to overconsumption, and it also leads to malinvestment: This means that additional investments are encouraged, in particular in time-consuming, i.e., capital-intensive production.

Once the additional injection of bank credit and money has worked its effect through the economy – raising goods prices and wages, and raising goods prices in the capital industries more than in less-time consuming industries, i.e. consumer goods industries – the boom comes to an abrupt halt. The market interest rate, artificially subdued during the boom, begins to rise.

As a result, people reduce consumption, save more, and investment demand drops. Entrepreneurs are finding that the surge in demand for their goods was temporary, not permanent, and inventories are building. Businesses realize that they have invested too much and/or in production lines proving unprofitable. They stop and liquidate investment projects and reduce their staff. People’s incomes start to decline.

A growing number of firms and private households default on their debt. Banks suffer losses and grow reluctant to extend new credit and are unwilling to refinance maturing customer loans. The economy contracts, goods prices and wages adjust accordingly. They are aligned to levels that ensure production caters to the most pressing customer needs.

Clearly, the observations we can make in a bust include business failures, bank closures, rising unemployment, falling asset prices, declining market liquidity, credit crunch, spiking borrowing costs, etc. And following a simplistic positivist-empiricist-falsificationist interpretation, people could all too easily blame these observations in one way or another for causing the crisis, the bust.

However, based on the logic of human action, the observations just mentioned are merely symptoms of the root cause of the crisis, namely bank credit expansion (not backed by real savings) and the associated issuance of unbacked money balances. The logic of human action also reveals that the boom is when misallocations occur and that the bust period is when they are corrected.

These effects can only be correctly understood through logical thinking, rigorously applying the method of the logic of human action (which Ludwig von Mises called praxeology) in economics. Contrary to the positivistic-empiristic-falsificationist method, the logic of human action reveals that issuing unbacked money through bank credit expansion leads to overconsumption and malinvestment, eventually resulting in a bust.

It explains without any epistemological doubt that governments’ monopolization of money production, central banking, money creation out of thin air via bank credit expansion, and ‘fractional reserve banking’ are the root cause of economic and financial crises, of boom and bust, of chronic inflation and the debasement of the purchasing power of money as we have to come to know them today.

While empirical evidence may potentially blame all sorts of factors for a crisis, human logic, using rigorous a priori reasoning, identifies the issue of money creation out of thin air as the root cause of boom and bust. This is, of course, a rather inconvenient truth for mainstream economist thinking. Because it would unmask today’s government-sponsored fiat money for what it really is: an economically and socio-political destructive scheme.


This is a truth that does not go down well with economists on the governments’ payrolls or funded by firms, organizations, and politicians thriving on the fiat money regime. Clearly, uncovering the truth about the fiat money regime could cost them their career, income, prestige, and societal status. But it may not just be fear or a lack of intellectual courage that keeps many economists from exposing the fiat money system for what it is.

Many might simply be unfamiliar with the logic of human action as the appropriate scientific method in economics. Undoubtedly, looking at empirical data, building sophisticated models, and engaging in testing hypotheses – as economists do according to the positivistic-empiricistic-falsificationistic method – would leave much, if not all, of the problems that come with the fiat money regime in the dark.

“The cause of the crisis that must not be named” amounts to a paradigm for shirking the truth of fiat money – and is morally and ethically unacceptable. The key to fully understanding the workings of fiat money and its economic and political consequences is to accept the logic of human action as the appropriate scientific method in economics. This is where progress must be made to overcome false economic thinking and the societal aberrations it causes.


Literature: Mises, L. v. (1996), Human Action. A Treatise on Economics, Scholars Edition, Ludwig von Mises Institute, Auburn, US Alabama. | Mises, L. v. (1956), Theory and History. An Interpretation of Social and Economic Evolution, Ludwig von Mises Institute, Auburn, US Alabama. | Hoppe, H. H. (1983), Kritik der kausalwissenschaftlichen Sozialforschung. Untersuchungen zur Grundlegung von Soziologie und Ökonomie, SZS, Vol. 55, Opladen. | Polleit, T. (2022), Der Weg zur Wahrheit. Eine Kritik der ökonomischen Vernunft, Finanzbuch Verlag, München.


Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor of economics at the University of Bayreuth. He is an Adjunct Scholar of the Ludwig von Mises Institute, Auburn, US Alabama, and president of the Ludwig von Mises Institute Deutschland. Thorsten Polleit also acts as an investment advisor.


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