The Perils of Monetary Central Planning: Children’s Edition

“Ludwig von Mises, the great Austrian economist, said that business cycles involve a mismatch between entrepreneurs’ plans and the actual supply of resources.  In a boom-bust cycle, entrepreneurs are like a master-builder who overestimates his available resources and tries to construct a building that cannot be completed as planned.” – Ludwig the Builder

On May 13, 2026, the United States Senate confirmed a new Fed Chair, Kevin Warsh, to a 4-year term.  Despite the Federal Reserve’s role as a private, yet public entity, politics often plays a part.  Since it is the function of the Board of Governors to set borrowing costs, the raising and lowering of the fed rate can seemingly improve or worsen conditions in the economy.  As a result, the departing chair Jerome Powell often drew the ire of President Trump, who repeatedly threatened to fire him if he refused to lower interest rates to boost the stock market.  Since the overall cost of borrowing affects everything from credit card debt to car loans, decisions by the Fed Chair can influence economic activity. 

In Jonathan Newman’s 2023 children’s book, “Ludwig the Builder”, Newman tells the story of an entrepreneurial builder who planned to build a house for a family in a quiet neighborhood.  Relying on the warehouse manager for his supplies, he set about creating a blueprint for the perfect family abode.  But the manager’s calculation proved wrong, and the project was put in jeopardy until the master builder took matters into his own hands.    Jonathan Newman, a Professor of Economics at the Mises Graduate School, is part of the Mises Institute, founded in 1982 to promote the ideas of Austrian Economist Ludwig von Mises, who first developed a coherent theory of government-induced boom-bust cycles.

Hidden in the story is a lesson in Austrian business cycle theory.  That is, when governments intervene in assigning artificially low interest rates while aggressively expanding credit, malinvestment of resources results.  The artificial booms that are created ultimately end in a bust, when a lack of supplies leads to failed projects.  Thus, Newman’s story shows the differences between the effects of monetary central planning by the government versus those of a free market alternative.  Since the government controls the supply of money, interest rates, and credit expansion, entrepreneurs are continuously subjected to resource misallocations, distorting the natural signals present in free markets.  This interference by the government deprives entrepreneurs of reality-based economic indicators. 

In a free market, an economy grows from the savings of consumers based on the time preference of individuals who prioritize future spending over current consumption.  Real capital comes from these savings alone, which will create the tools, machines, and technology that produce efficiencies in production.  Thus, once savers sacrifice consumption, entrepreneurs gain the capital necessary to create new products and services that consumers will eventually buy.   In a free market, interest rates on capital would fluctuate to reflect the reality on the ground, giving entrepreneurs proper signals in which to make sound investments.   

Unfortunately, the government’s control of money creates a business cycle of artificial booms and corresponding busts.  A business cycle occurs when a government-induced boom is extended, and more credit expansion is used to keep the boom going, preventing a necessary bust from occurring.  Artificial booms are created when the government increases the supply of credit by producing money out of thin air, creating the appearance of resources.  This new money is an artificial stimulant since there is no savings from delayed consumption that has produced the needed capital. 

When new money is created by the government, interest rates decrease, as they would with real savings.  Both events trigger entrepreneurs to start projects, but only real savings create real resources.  The matter is made worse by our fractional reserve banking system, which allows for more credit expansion beyond real savings.  The boom increases the production of goods while increasing employment, leading to economic growth.  But when the growth is artificially created, it cannot be sustained, leading to shortages of resources and business failures.  Instead, a bust follows, signaling economic contraction.  Due to the mismatch between entrepreneurial plans and false resources, projects must end, layoffs ensue, and assets are liquidated.  If the government continues to create more and more money, the business cycle of booms and busts remains, preventing correction.  In a healthy society, plans are redrawn, as Ludwig the builder did, in altering his designs for a smaller home to account for the lack of supplies. 

In today’s story, Ludwig the builder is the entrepreneur, while Fred, the warehouse manager, is the central bank.  Although the builder painstakingly calculated the materials needed to build the house in his detailed blueprint, the banker provided false information.  As a result, there were not enough materials to complete the job. 

To avoid future resource misallocation, the answer is clear.  Government management of the economy must end, since the intervention itself was the very cause of the problem.  With the federal government out of the way, the markets themselves will coordinate the appropriate allocation of resources to entrepreneurs.  Since this manner of production allows for the best coordination of marketing plans, consumer preferences, and resource allocation, there is less chance for overproduction as markets naturally balance production against consumption, resulting in much-needed economic growth.