Abstract
This paper defends the relevance of Austrian Business Cycle theory (ABCT) within a fiat money regime, by providing an answer to whether a constant rate of credit expansion necessarily leads to a boom-bust cycle. We claim that this scenario has two potential outcomes, (1) a change in money demand brings the economy back towards equilibrium or (2) the economy will shift to a sub-optimal but still sustainable path. We identify capital heterogeneity effects and the Ricardo effect as distinctly Austrian explanations for an upper turning point, even in a fiat money regime.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Following the earlier literature we use the term “credit expansion” but “monetary expansion” could be used with no loss of meaning.
Admittedly this rests on an assumption about the propensity to spend of the relevant agents.
Hummel (1979) acknowledges the potential for Ricardo effects but points out that this implies an increase in time preferences.
Skousen (1988) argues that the manifestation of consumer price inflation will lead to a policy response from central banks, and thus mark the upper turning point.
It should be added, however, that this credit expansion should also be moderate enough to not trigger a fall in money demand. This, however, usually becomes a serious issue with high rates of inflation, such as the cases of hyperinflation.
Luther and McElyea (2018) provide a rudimentary Austrian model to demonstrate how a stable growth path can be achieved.
References
Cachanosky, N., & Lewin, P. (2014). Roundaboutness is not a mysterious concept: A financial application to capital theory. Review of Political Economy, 26(4), 648–665.
Cachanosky, N. (2015). Expectation in Austrian business cycle theory: Market share matters. The Review of Austrian Economics, 28(2), 151–165.
Cachanosky, N., & Lewin, P. (2016). Financial foundations of Austrian business cycle theory. Advances in Austrian Economics, 20, 15–44.
Cachanosky, N., & Salter, A. W. (2017). The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle. The Review of Austrian Economics, 30(2), 169–192.
Cowen, T. (1997). Risk and business cycles: New and old Austrian perspectives. New York: Routledge.
Dixit, A. K., & Pyndick, R. S. (1994). Irreversible investment. Princeton: Princeton University Press.
Friedman, M. (2006). Unemployment versus inflation? An analysis of the Philips curve. In K. Mathews & P. booth (Eds.), Issues in Monetary Policy.
Garrison, R. W. (2001). Time and Money. The Macroeconomics of Capital Structure. (M. J. Rizzo & L. H. White, Eds.) (2002nd ed.). London and New York: Routledge.
Hayek, F. A. (1934). On the relationship between investment and output. The Economic Journal, 44(174), 207–231.
Hayek, F. A. (1937). Investment that raises the demand for capital. Review of Economics Statistics, 19(4), 174–177.
Hayek, F. A. (1942). Professor Hayek and the concertina-effect: A comment. Economica, 9(36), 383–385.
Hayek, F. A. (1969). Three elucidations of the Ricaro effect. Journal of Political Economy, 77(2), 274–285.
Horwitz, S. G. (2000). Microfoundations and macroeconomics: An Austrian perspective (2003rd ed.). London and New York: Routledge.
Huerta de Soto, J. (1998). Money, Bank Credit, and Economic Cycles. (M. a. Stroup, trans.) (2012th ed.). Auburn: The Ludwig von Mises Institute.
Hummel, J. R. (1979). Problems with Austrian business cycle theory. Reason Papers, 5(Winter), 41–53.
Luther, W., & McElyea, J. P. (2018). Austrian Macroeconomcis in search of its uniqueness. Journal of Private Enterprise, 33(2), 1–20.
von Mises, L. (1912). The Theory of Money and Credit. (H. E. Batson, trans.) (1981st ed.). Indianapolis: Liberty Fund.
von Mises, L. (1928). Monetary stabilization and cyclical policy” published in On the Manipulation of Money and Credit, Greaves, P.L, (ed.) Free Market Books [1978]
Mishkin, F. S. (1988). Economics of money, banking and financial markets (2012th ed.). Prentice Hall.
Nam, J.-H. (1993). The liquidity, income and fisher effects of money on interest: The case of developing country. Seoul Journal of Economics, 6(3).
O’Driscoll, G. P. J., & Rizzo, M. J. (1985). The Economics of Time and Ignorance. (M. J. Rizzo & L. H. White, Eds.) (1996th ed.). New York: Routledge.
Salter, A. & Luther, W. (2016) "The optimal Austrian business cycle theory" Studies in Austrian Macroeconomics (Advances in Austrian Economics, Vol. 20) Emerald Group publishing limited, pp. 45-60.
Selgin, G. A. (1988). The theory of free banking. Lanham: CATO Institute and Rowman & Littlefield.
Skousen, M. (1988). “What every investor should know about Austrian economics and the hard-money movement” Mises Institute
Skousen, M. (1990). The structure of production. New York: New York University Press.
White, L. H. (1984). Free banking in Britain. Theory, experience and debate, 1800–1845 (1995th ed.). London: The Institute of Economic Affairs.
White, L. H. (1999). The theory of monetary institutions. Oxford: Basil Blackwell.
White, L. H. (2012). The clash of economic ideas. Cambridge: Cambridge University Press.
Acknowledgements
We appreciate helpful comments from Jeffrey Rogers Hummel and two anonymous referees from this journal. The usual disclaimer applies.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher’s note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Evans, A.J., Cachanosky, N. & Thorpe, R. The upper turning point in the Austrian business cycle theory. Rev Austrian Econ 35, 89–97 (2022). https://doi.org/10.1007/s11138-019-00497-2
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11138-019-00497-2