Australian Business Cycle

Topics: Macroeconomics, Business cycle, Austrian School Pages: 7 (1258 words) Published: September 5, 2014


Austrian Business-Cycle Theory
Table of Content
History ……………………………………………………………….…………………....3 Theory Explained…………………………………………………….…………………....3 Argue for or against the theory (Stance)…………………………………………………..4 Similar supporting theory…………………..……………………………….…………….5 Criticisms………………………………………………………………………………….6 Conclusion…………………………………………………………………………..…….7 References…………………………………………………………………………………8

History of Austrian Business-Cycle Theory
The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics concerning how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to an artificially low market rate of interest. 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 in part for his work on this theory. The Theory Explained

According to the theory, the boom-bust cycle of malinvestment is generated by excessive and unsustainable credit expansion to businesses and individual borrowers by the banks. This credit creation makes it appear as if the supply of "saved funds" ready for investment has increased, for the effect is the same: the supply of funds for investment purposes increases, and the interest rate is lowered. Borrowers, in short, are misled by the bank inflation into believing that the supply of saved funds (the pool of "deferred" funds ready to be invested) is greater than it really is. When the pool of "saved funds" increases, entrepreneurs invest in "longer process of production," i.e., the capital structure is lengthened, especially in the "higher orders", most remote from the consumer. Borrowers take their newly acquired funds and bid up the prices of capital and other producers' goods, which, in the theory, stimulates a shift of investment from consumer goods to capital goods industries. Austrians further contend that such a shift is unsustainable and must reverse itself in due course. Proponents of the theory conclude that the longer the unsustainable shift in capital goods industries continues, the more violent and disruptive the necessary re-adjustment process. The lower interest rates increase the relative value of cash flows that come in the future. When modelling an investment opportunity, if interest rates are artificially low, entrepreneurs are led to believe the income they will receive in the future is sufficient to cover their near term investment costs. In simple terms, investments that would not make sense with a 10% cost of funds become feasible with a prevailing interest rate of 5% (and may become compelling for many entrepreneurs with a prevailing interest rate of 2%) Argue for or against an established theory (My Stance)

In my opinion, Capital Based Macroeconomics is an outgrowth of the Austrian theory of the business cycle is powerful way to grow the economy. I believe that understanding Austrian business cycle theory can help us understand where things are headed, so that we can invest accordingly What it is: Austrian business cycle theory basically posits that bubbles and busts result primarily from an overexpansion of credit. Credit is too cheap and too easy. Entrepreneurs’ are trained in finding marker opportunities and in efficiencies in the marker; and thus, the Austrian business cycle posits, entrepreneurs as a whole can only be collectively mislead for a sustained period if credit is excessively expanded. This will cause entrepreneurs to excessively invest in capital- intensive projects, like building houses The result: The result of this excessive expansion is that the market will eventually try to deflateand purge the misguided investments out of the market. This will result in deflation What government policy should be: According to Austrian business cycle theory, deflation is good and...

References: Selgin, G. (2012, Oct 03). Two Problems with Austrian Business-Cycle Theory. Uneasy Money.
Horwitz, Steven. "Contrasting concepts of capital: yet another look at the Hayek-Keynes debate." Journal of Private Enterprise Fall 2011: 9+. Business Economics and Theory Collection. Web. 22 Aug. 2014.
Patel, S. (2008, Dec 03). Austrian Business Cycle Theory: An Introduction to Investing Using Austrian Business Cycle Theory.
McCulloch., J. H. (2014). Misesian insights for modern macroeconomics. The Quarterly Journal of Austrian Economics.
Horwitz, Steven. "Contrasting concepts of capital: yet another look at the Hayek-Keynes debate." Journal of Private Enterprise Fall 2011: 9+. Academic OneFile. Web. 22 Aug. 2014
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Business Cycles Research Paper
  • Essay on Business Cycle
  • Business cycle Essay
  • Skyscraper: Economics and Business Cycle Essay
  • Essay about Mexico Business Cycle
  • Macro Economics
  • Management Economics: Define 'Business cycle'. Explain various phases of business cycle? Essay
  • Monetary Policy

Become a StudyMode Member

Sign Up - It's Free