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The rise and fall of the subsistence fund as a resource constraint in Austrian business cycle theory


The “subsistence fund” was once an integral part of Austrian business cycle theory to indicate the resource constraint on the ability to complete investments. Early agrarian and industrial economies were constrained by resource availability in a manner consistent with that alluded to by the subsistence fund. This link became more tenuous as the growth of the financial economy in the twentieth century removed the apparent importance of pre-saved goods to complete investments. At this point the subsistence fund came to be used only as a metaphor and was jettisoned from Austrian business cycle theory. The present paper points to the merits of the subsistence fund in explaining the turning point of the business cycle as compared to alternative explanations. It also works out the deficiencies in historical expositions of the Austrian theory based on the subsistence fund, and traces the evolution of the resource constraint at the core of Austrian economists´ treatment of the business cycle.

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  1. There are additional reasons to doubt the importance of the ideological explanation as the sole reason that Keynesian ideas took hold at the expense of the Austrian theory of the business cycle. As one referee points out, it is ironic to state that Keynes beat Hayek for ideological reasons when the Keynesian consensus subsequently lost some ground to the New Classical School which was more aligned with the arguments at the core of ABCT. Under this interpretation, the relevant elements of ABCT were incorporated by the mainstream and the incorrect or irrelevant elements were rejected. While there is debate as to what degree the mainstream view of ABCT is a “correct” interpretation (see, e.g., Salerno 2012), this paper does not intend to delve into this debate. Instead it sheds light on the difficulties encountered by Austrian economists in updating at least one element of ABCT – the subsistence fund – to the more modern, financialized, economy.

  2. What Mises (1949: 427, 436, 469, 544, and passim) coined a “crack-up boom.”

  3. The idea that this year’s harvest is related to next year’s harvest was already foreshadowed by Adam Smith’s discussion of the “corn economy” (Smith 1776, book II, chap. III). Later developments focused on the relationships between the harvest of one year and subsequent levels of productivity and wages as factors that would affect future harvests (Hicks 1965: 36–42; Lachmann 1968: 130–42; Lewin 1999: 53–57).

  4. Mises was not consistent in his use of the subsistence fund throughout his writings on the business cycle (Braun 2012). Early formulations put the onus of investment sustainability on the subsistence fund (Mises [1912] 1953). His last exhibition eschewed the subsistence fund almost completely as an explanation of the turning point of the business cycle and instead relied on skewed expectations and the difficulties of planning in an inflationary environment (Mises 1949).

  5. Adherents to ABCT during the 1930s were not unified in this belief. Machlup (1932: 279–80) reckoned that a reduction in the interest rate would not affect all projects homogenously but rather it would entice entry into industries less reliant on fixed capital.

  6. This argument traces back to Wicksell ([1898] 1936: 16) who stressed that “the ideally correct procedure for observing and measuring the general price level is to confine the calculation to objects of (direct) consumption.”

  7. This shift marked a reversal for Hayek, who five years earlier defined the subsistence fund exclusively in terms of capital goods saved up to complete undertaken production processes (Hayek 1935b). This shift was itself a reversal from Hayek ([1935a] 2008, 1934) where the subsistence fund was defined in the much more conventional (at least for the time) way as a sum of consumer goods.

  8. Rothbard (2004) and Huerta de Soto (2012) all build upon Hayek’s argument and do not integrate the subsistence fund as Mises ([1912] 1953) and Strigl ([1934] 2000) had done. In one of the more influential recent expositions of Austrian business cycle theory Garrison (2001: 58) mentions the subsistence fund but once, and only as a passing allusion to the general availability of investable resources, not in terms of a potentially binding resource constraint.

  9. Although commonly treated as synonymous, Hayek’s and Mises’s treatments of the business cycle differed in several ways. While herein we demonstrate Hayek’s reluctance to make use of the subsistence fund to the extent that the early Mises did, Garrison (2004) looks to their differing conceptions of forced savings, as well as Mises’s attention to the role of overconsumption in defining the boom’s unsustainability, an aspect which is not unrelated to his earlier work on the subsistence fund.


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Braun, E., Howden, D. The rise and fall of the subsistence fund as a resource constraint in Austrian business cycle theory. Rev Austrian Econ 30, 235–249 (2017).

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  • Subsistence fund
  • Early business cycle theories
  • Austrian business cycle theory
  • Wages fund

JEL Classification

  • B13
  • B25
  • E32