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Source link: http://archive.mises.org/5568/the-austrian-business-cycle-in-the-ft/

The Austrian Business Cycle in the FT

September 5, 2006 by

Chris Coyne draws our attention to this nice story in the Financial Times.

The investment theme of the autumn will instead be the vindication of the Austrian economists and their theories about the nature of the business cycle.

At this point, even most well-informed financial people will say “What? Austrian what?” After giving the matter a little thought, though, it will turn out that many will find they have been Austrians all along, though they didn’t realise it.

There are many aspects to, and conflicts within, the Austrian school of economics, much of which is based on the work of Ludwig Van Mises and Frederick Hayek in the middle part of the past century.

While based on earlier theorists, the Austrians – not all of whom were Austrian – were reacting to the whole range of state-directed macroeconomics, from communism and fascism to social democracy and Keynesianism. They believed that state planning not only got the economics wrong but led to political and intellectual servitude.

The aspect of Austrian economics that will be central to investment decision-making this autumn is the role of central banking in generating unsustainable investment booms and subsequent busts.

The biggest world investment boom in history, which we have been going through for the past decade, is becoming a bust, most notably in the US housing market.

If the founding Austrians had Marxists and Keynesians as their opposition theorists, the present-day Austrians have Alan Greenspan and Ben Bernanke and their enablers in the US political system.



Black Bloke September 5, 2006 at 11:47 am

They misspelled the “von” in LvM, but it looks okay.

George Gaskell September 5, 2006 at 12:27 pm

The Fed, with the encouragement and support of the political class, kept rates low so as continually to postpone financial busts over the past decade and a half. This has led to over-investment …

“Over-investment” is a Keynesian term, I believe. The Austrian term is “malinvestment.”

The distinction is not trivial.

Still, good to see.

Blah September 5, 2006 at 12:36 pm

The writer makes some good points, but he says the Fed has caused over-investment. In Rothbard’s “America’s Great Depression”, he addresses this incorrect label by quoting Mises:

“The boom itself does not result in a restriction but rather in an increase in consumption, it does not procure more capital goods for new investment. The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e. malinvestment.”

“The observer notices only the malinvestments which are visible and fails to recognize that these establishments are malinvestments only because of the fact that other plants – those required for the production of the complementary factors of productions and those required for the production of consumers’ goods more urgently demanded by the public – are lacking.”

“The whole entrepreneurial class is, as it were, in the position of a master-builder who overestimates the quantity of the available supply of materials, oversizes the groundwork, and only discovers later that he lacks the material needed for the completion of the structure. It is obvious that our master-builder’s fault was not over-investment, but an inappropriate investment.”

David Z September 6, 2006 at 5:04 pm

The investment boom coupled with the decline in the savings rate is characteristic of Austrian business cycle theory, and the situation reeks of interest rate manipulation.

Dan Ust September 7, 2006 at 3:55 pm

Regarding overinvestment vs. malinvestment, I think the problem is that most people are translating this stuff — ABCT — into their conceptual scheme. Keynesians and postKeynesians are used to overinvestment and since most economists and their seconds seem to assume capital is uniform and homogeneous, it’s hard for them to think in terms of a direction or a structure of capital.

Joe McTaggart. September 7, 2006 at 6:06 pm

Doctor Joseph Flubacher, a brilliant Econ 101 professor, did not flunk me in his class since we laughed while disagreeing. That was 55 years ago, long before I heard of Mises or Rothbard … the good guys. The main problem was that Floobie, sincere in his Keynesian beliefs, became quite upset when I told him that my impression was that, in his writings, John Maynard Keynes simply HAD to be JOKING with us.

Robert September 8, 2006 at 9:11 am

The Austrian theory of business cycles is incorrect.

Where can I find recent literature setting out the mistaken Austrian theory?

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