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Entrepreneurial Error Does Not Equal Market Failure

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  • Bagus, Philipp
  • Howden, David
  • Huerta de Soto Ballester, Jesús

Abstract

Barnett and Block (forthcoming) claim that Bagus and Howden (2012b) support indirectly the concept of market failure. In this paper we show that maturity mismatching in an unhampered market may imply entrepreneurial error but cannot be considered a market failure. We demonstrate why fractional-reserve banking leads to business cycles even if there is no central bank and why maturity mismatching does not per se lead to clusters of errors in a free market. Finally, we assure that, in contrast to the examples provided by Barnett and Block, maturity mismatching does not imply the creation of two incompatible contracts due to the fungible nature of money.

Suggested Citation

  • Bagus, Philipp & Howden, David & Huerta de Soto Ballester, Jesús, 2018. "Entrepreneurial Error Does Not Equal Market Failure," MPRA Paper 86706, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:86706
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    References listed on IDEAS

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    1. David Howden, 2010. "Knowledge shifts and the business cycle: When boom turns to bust," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 165-182, June.
    2. David Howden & Amadeus Gabriel, 2015. "The Interest Rate Brake on Maturity Transformation," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(4), pages 1100-1111, October.
    3. Hayek, F. A. & Caldwell, Bruce, 2007. "The Pure Theory of Capital," University of Chicago Press Economics Books, University of Chicago Press, number 9780226320991 edited by White, Lawrence H., September.
    4. Anthony Evans, 2014. "In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate," Journal of Business Ethics, Springer, vol. 124(2), pages 351-364, October.
    5. Laura Davidson, 2015. "Ethical Differences Between Loan Maturity Mismatching and Fractional Reserve Banking: A Natural Law Approach," Journal of Business Ethics, Springer, vol. 131(1), pages 9-18, September.
    6. Williams, Jeffrey C, 1984. "Fractional Reserve Banking in Grain," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 488-496, November.
    7. Philipp Bagus & David Howden & Walter Block, 2013. "Deposits, Loans, and Banking: Clarifying the Debate," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(3), pages 627-644, July.
    8. Philipp Bagus & David Howden, 2012. "The Continuing Continuum Problem of Deposits and Loans," Journal of Business Ethics, Springer, vol. 106(3), pages 295-300, March.
    9. Carilli, Anthony M & Dempster, Gregory M, 2001. "Expectations in Austrian Business Cycle Theory: An Application of the Prisoner's Dilemma," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 14(4), pages 319-330, December.
    10. Leland Yeager, 2010. "Bank reserves: A dispute over words and classification," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 183-191, June.
    11. Philipp Bagus & David Howden & Amadeus Gabriel, 2015. "Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere," Journal of Business Ethics, Springer, vol. 128(1), pages 197-206, April.
    12. William Barnett & Walter Block, 2011. "Rejoinder to Bagus and Howden on Borrowing Short and Lending Long," Journal of Business Ethics, Springer, vol. 100(2), pages 229-238, May.
    13. Philipp Bagus & David Howden, 2016. "The economic and legal significance of “full” deposit availability," European Journal of Law and Economics, Springer, vol. 41(1), pages 243-254, February.
    14. Philipp Bagus & David Howden, 2009. "The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking," Journal of Business Ethics, Springer, vol. 90(3), pages 399-406, December.
    15. Philipp Bagus & David Howden, 2012. "Still unanswered quibbles with fractional reserve free banking," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(2), pages 159-171, June.
    16. Bagus, Philipp & Howden, David, 2010. "The Term Structure of Savings, the Yield Curve, and Maturity Mismatching," MPRA Paper 79592, University Library of Munich, Germany.
    17. Bagus, Philipp & Howden, David, 2013. "Some Ethical Dilemmas with Modern Banking," MPRA Paper 79599, University Library of Munich, Germany.
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    Cited by:

    1. Jesús Huerta de Soto & Antonio Sánchez-Bayón & Philipp Bagus, 2021. "Principles of Monetary & Financial Sustainability and Wellbeing in a Post-COVID-19 World: The Crisis and Its Management," Sustainability, MDPI, vol. 13(9), pages 1-11, April.

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    More about this item

    Keywords

    Borrow; lend; deposit; loan; compatible contracts; fungible goods; specific goods; maturity mismatching; fractional-reserve banking; ABCT; banking ethics;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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