Business Cycle


Austrian Business Cycle Theory - Government policy error



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Austrian Business Cycle Theory - Government policy error

  • According to Ludwig von Mises:[http://mises.org/document/3250 Human Action], Ludwig von Mises, Chapter XX, section 8



Austrian Business Cycle Theory - Government policy error

  • There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.



Austrian Business Cycle Theory - The role of central banks

  • Austrians generally argue that inherently damaging and ineffective central bank policies, including unsustainable expansion of bank credit through fractional reserve banking, are the predominant cause of most business cycles, as they tend to set artificial interest rates too low for too long, resulting in excessive credit creation, speculative economic bubble|bubbles, and artificially low savings.Thorsten Polleit, [http://mises.org/story/2810 Manipulating the Interest Rate: a Recipe for Disaster], 13 December 2007 Under fiat money|fiat monetary systems, a central bank creates new money when it lends to member banks, and this money is multiplied many times over through the money creation process of the private banks



Austrian Business Cycle Theory - History

  • This early development of Austrian business cycle theory was a direct manifestation of Mises's rejection of the concept of neutral money and emerged as an almost incidental by-product of his exploration of the theory of banking



Austrian Business Cycle Theory - History

  • Others who responded critically to Hayek's work on the business cycle included John Hicks, Frank Knight, and Gunnar Myrdal.Bruce Caldwell (historian of economic thought)|Bruce Caldwell, Hayek's Challenge: An Intellectual Biography of F



Austrian Business Cycle Theory - History

  • Austrian economist Roger Garrison explains the origins of the theory:



Austrian Business Cycle Theory - History

  • In Business Cycles and Depressions



Austrian Business Cycle Theory - History

  • Ludwig von Mises and Friedrich Hayek were two of the few economists who gave warning of a major economic crisis before Wall Street Crash of 1929|the great crash of 1929. In February 1929, Hayek warned that a coming financial crisis was an unavoidable consequence of reckless monetary expansion.



Austrian Business Cycle Theory - History

  • Austrian School economist Peter J



Austrian Business Cycle Theory - History

  • Hanke identifies the Late-2000s financial crisis|2007–2010 Global Financial Crises as the direct outcome of the Federal Reserve Bank's interest rate policies as is predicted by the Austrian business cycle theory



Austrian Business Cycle Theory - Empirical research

  • Keeler argued that the theory is consistent with empirical evidence In a 1998 interview, Friedman summarized his view of the Austrian Business Cycle Theory:



Austrian Business Cycle Theory - Empirical research

  • :I think the Austrian business-cycle theory has done the world a great deal of harm



Austrian Business Cycle Theory - Empirical research

  • According to most economic historians, economies have experienced less severe boom-bust cycles after World War II, because governments have addressed the problem of economic recessions. Many argued, prior to the events of 2008, that this has especially been true since the 1980s because central banks were granted more independence and started using monetary policy to stabilize the business cycle, an event known as The Great Moderation.



Austrian Business Cycle Theory - Reactions of economists and policymakers

  • According to Nicholas Kaldor, Hayek's work on the Austrian business cycle theory had at first fascinated the academic world of economists, but attempts to fill in the gaps in theory led to the gaps appearing larger, instead of smaller, until ultimately one was driven to the conclusion that the basic hypothesis of the theory, that scarcity of capital causes crises, must be wrong.



Austrian Business Cycle Theory - Reactions of economists and policymakers

  • Lionel Robbins, who had embraced the Austrian theory of the business cycle in The Great Depression (1934), later regretted having written that book and accepted many of the Keynesian counterarguments.R. W. Garrison, [http://www.auburn.edu/~garriro/amagi.htm F. A. Hayek as 'Mr. Fluctooations:' In Defense of Hayek's 'Technical Economics'], Hayek Society Journal (LSE), '5'(2), 1 (2003).



Austrian Business Cycle Theory - Reactions of economists and policymakers

  • The Nobel Prize Winner Maurice Allais was a proponent of Austrian business cycle theory and their perspective on the Great Depression and often quoted Ludwig Von Mises and Murray N. Rothbard.See pp. 728–731, Jesus Huerta de Soto(1998)






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