We accept as a fact of economic life that plush times inevitably give way to lean times. Just as the moon waxes and wanes, the economy goes through booms and busts.

Median home price increased by 150 percent from August 1998 to August 2006. Over the next two years, home prices fell by 23 percent. Foreclosures skyrocketed.

The stock market has followed a similar course. When the New York Stock Exchange closed on Oct. 9, 2007, the Dow was 14,164.53, the highest close ever. Thirteen months later, it closed at 7,552.29, a drop of 46.7 percent. Retirement portfolios have been eviscerated. Unemployment has increased. When the figures are compiled the way government calculated them in the 1970s, the unemployment rate in November 2008 was 16.7 percent.

These personal dimensions of busts are used to justify government intervention, whether creating a safety net or drawing up regulations aimed at smoothing out the cycle supposedly inherent in the free market. But is this inevitable? Is the market economy really prone to sudden, inexplicable episodes of massive business error—or could something outside the market be causing it?

If politicians are honest in seeking a culprit, they will find that it’s not capitalism. It’s not greed. It’s not deregulation. It’s an institution created by government itself.

No one is surprised when a business has to close. Entrepreneurs may have miscalculated costs of production, failed to anticipate patterns of consumer tastes, or underestimated resources necessary to comply with ever-changing government regulation. But when many businesses have to close at once, that should surprise us. The market gradually weeds out those who do a poor job as stewards of capital and forecasters of demand. So why should businessmen, even those who have passed the market test year after year, suddenly all make the same kind of error?

Economist Lionel Robbins argued that this “cluster of errors” demanded an explanation: “Why should the leaders of business in the various industries producing producers’ goods make errors of judgment at the same time and in the same direction?” We call this pattern of apparent prosperity followed by general depression the business cycle, the trade cycle, or the boom-bust cycle. Does it have a cause, or is it, as Marx argued, an inherent feature of the market economy?

F.A. Hayek won the Nobel Prize in economics for a theory of the business cycle that holds great explanatory power—especially in light of the current financial crisis, which so many economists have been at a loss to explain. Hayek’s work, which builds on a theory developed by Ludwig von Mises, finds the root of the boom-bust cycle in the central bank—in our case the Federal Reserve System, the very institution that postures as the protector of the economy and the source of relief from business cycles.

Looking at the money supply makes sense when searching for the root of an economy-wide problem, for money is the one thing present in all corners of the market, as Robbins pointed out in his 1934 book, The Great Depression.“Is it not probable,” he asked, “that disturbances affecting many lines of industry at once will be found to have monetary causes?”

In particular, the culprit turns out to be the central bank’s interference with interest rates. Interest rates are like a price. Lending capital is a good, and you pay a price to borrow it. When you put money in a savings account or buy a bond, you are the lender, and the interest rate you earn is the price you are paid for your money.

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