Austrian business cycle theory

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The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics seeking to explain how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit due to artificially low interest rates set by a central bank or fractional reserve banks.[1] The Austrian business cycle theory originated in the work of Austrian School economists Ludwig von Mises and Friedrich Hayek. Hayek won the Nobel Prize in Economics in 1974 (shared with Gunnar Myrdal) in part for his work on this theory.[2][3][4]

According to the theory, the business cycle unfolds in the following way: low interest rates tend to stimulate borrowing, which lead to an increase in capital spending funded by newly issued bank credit. Proponents hold that a credit-sourced boom results in widespread malinvestment. A correction or credit crunch, commonly called a "recession" or "bust", occurs when the credit creation has run its course. The money supply then contracts (or its growth slows), causing a curative recession and eventually allowing resources to be reallocated back towards their former uses.

The Austrian explanation of the business cycle differs significantly from the mainstream understanding of business cycles and is generally rejected by mainstream economists.[5][6][7][8] Austrian School theorists have continued to contest these conclusions.[9]

  1. ^ Manipulating the Interest Rate: a Recipe for Disaster, Thorsten Polleit, 13 December 2007.
  2. ^ Woods, Jr., Thomas (2007). "22:Did Capitalism Cause the Great Depression?". 33 Questions about American History You're Not Supposed to Ask. New York: Crown Forum. pp. 174–179. ISBN 978-0-307-34668-1.
  3. ^ "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1974". NobelPrize.org.
  4. ^ "The weeds of destruction". Economist. 2006-05-04. Retrieved 2008-10-08.
  5. ^ Cite error: The named reference Friedman1969 was invoked but never defined (see the help page).
  6. ^ Cite error: The named reference Friedman93 was invoked but never defined (see the help page).
  7. ^ Krugman, Paul (1998-12-04). "The Hangover Theory". Slate. Archived from the original on 6 July 2008. Retrieved 2008-06-20.
  8. ^ Hummel, Jeffrey Rogers (Winter 1979). "Problems with Austrian business cycle theory" (PDF). Reason Papers (5): 41–53. Retrieved 2017-05-27.
  9. ^ kanopiadmin (2011-01-20). "My Reply to Krugman on Austrian Business-Cycle Theory". Mises Institute. Retrieved 2020-12-28.