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Austrian Business Cycle Theory: Traditional and Fiscal

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When governments accounted for a small proportion of the economy, the Austrian Business Cycle theory (ABCT) was apropos because private enterprises comprised the lion’s share of commercial interactions. But, of late, in more and more countries, the share of the economy accounted for by the state has increased, and that by business firms, less and less. Thus, it is time, it is past time, to introduce a new concept, Austrian Government Cycle Theory (AGCT). The present chapter is an attempt to move us in that direction.


  • Business cycle
  • Austrian economics
  • Inflation
  • Depression

JEL Code

  • E14

Austrian capital theory amounts to a theory of intertemporal coordination; Austrian business-cycle theory (that is, the analysis of the effects of an exogenous monetary expansion in the light of Austrian capital theory) amounts to a theory of intertemporal discoordination.

Roger Garrison (1989, 24)

This chapter is based on our paper Futerman, Alan G.; Barnett II, William and Block, Walter E. 2020. “Austrian Government Cycle Theory”. World of Ideas and Politics, Vol. 19, pp. 9–28. Available at,_William_Barnett_II,_Walter_E._Block.pdf (last visited April 22, 2021).

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  1. 1.

    For more on this see Bagus (2003), Bagus et al. (2013), Barnett and Block (2005, 2008, 2009a), Baxendale (2010), Block and Caplan (2008), Block and Garschina (1996), Block and Posner (2008), Davidson (2008), Davidson and Block (2011), French (1992 [2009]), Hanke (2008), Hayek (1931, 1933 [1966]), Hazlitt (1979), Hollenback (2013, 2014), Hoppe (1994), Hoppe et al. (1998), Howden (2013), Huerta de Soto (1995, 1998, 2006, 2010, 2012, 2014, 2018), Hülsmann (1996, 1998, 2000, 2002; 2003; 2008), Kirzner (1990), Machlup (1940), Mises (1912), Mulligan (2006), Murphy (2010), Oppers (2002), Polleit (2010), Reisman (1996, 2009), Rothbard (1962 [1991]; 1963 [2008]; 1962 [2009]; 1962 [1991]), Salerno (2010a, b; 2011, 2012), White (2008a, b; 2010).

  2. 2.

    Duration and convexity are of course relevant for this financial dimension. See also Cwik (2008).

  3. 3.

    Or higher order.

  4. 4.

    An alternative explanation is provided by Block (2001). It is based on the claim that the government, in artificially lowering interest rates, is in effect subsidizing entrepreneurs into investing in more roundabout methods of production than would be warranted by the unchanged saving and consumption ratios of the public.

  5. 5.

    See on this Block and Barnett (2008).

  6. 6.

    Easily, at least, in comparison to when Mises and Hayek developed their theory. With a government weight of 10% in GDP, that means (for a weight of 50% now) a 400% increase.

  7. 7.

    See Bagus and Howden (2010; 2011).

  8. 8.

    Rothbard (1969) refers to this as the “cluster of error.”

  9. 9.

    For a critique of this appellation, but certainly not of the phenomenon it represents, see Block (2000a, b, 2002, 2015), DiLorenzo and Block (2017).

  10. 10.

    The matter of governmental attempts to alter people’s actions by attempting to alter their values raises difficult issues of moral and political philosophy; and, the consequences of such actions for the most fundamental of human values and rights are of the first magnitude of importance. This is particularly relevant for the libertarian philosophy.

  11. 11.

    Let us make a clarification here. This is often called a time preference “rate” in the scholarly literature of ABCT. But we eschew this verbiage since there is no real “rate” of preference here, any more than there is a “rate” of preference for vanilla vis a vis chocolate ice cream. Nevertheless, this is the way the concept is presented. See on this Barnett and Block (2011).

  12. 12.

    We are now back to ABCT.

  13. 13.

    These decrease for two reasons, a reduced cash flow, and a higher interest (discount) rate.

  14. 14.

    Woods (2009) points out that the depressions of 1921 and 1929 were initially roughly equal in terms of severity. However, there was little government intervention in the former case, and the depression phrase was shallow and of short duration. The opposite occurred in the latter case.

  15. 15.

    Government prohibiting individuals of smoking marijuana, or drinking alcohol, are also instances of binary intervention, but not economy-wide enough to count as business cycle related.

  16. 16.

    See Cwik (2004, 2008). In terms of ABCT, a reason for yield curve inversion anticipating recession could be that it signals investment projects progressively shifting from more to less roundabout (hence, the change upward in short term yields compared to long term).

  17. 17.

    For instance, central bank’s influence on long term rates is much lower (if not non-existent) than on short term rates (that it directly affects).

  18. 18.

    A new form could be “Fiscal QE”, see Selgin (2020).

  19. 19.

    The type of economy we have in mind may be more similar to that of the economic system of fascism.

  20. 20.

    Directly, or through government sponsored enterprises (GSEs). See Gjerstad and Smith (2014), Norberg (2009) and Pinto (2010a, b).

  21. 21.

    Rothbard (1962 [2009]) took the position that the state could only engage in consumption, never in production. For an alternative view, see Barnett and Block (2009b).

  22. 22.

    Continuing technological progress can often mask this phenomenon. The US was far freer, but poorer, in 1870 than in 2019. Does this mean the economic freedom reduces prosperity? Of course not. The difficulty here is that ceteris paribus conditions are not met. The latter period enjoys far better technology than the former.

  23. 23.

    See also on this Chapter 5 of Garrison (2001).

  24. 24.

    L. v. Mises, “The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money,” 1946, in On the Manipulation of Money and Credit.


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Futerman, A.G., Block, W.E. (2021). Macroeconomics. In: The Austro-Libertarian Point of View. Springer, Singapore.

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