Abstract
The aim of this paper is to critically assess Austrian Business Cycle (ABC) theory. Its foundation was laid in Theory of Money and Credit (1912) by Ludwig von Mises, which F. A. Hayek elaborated in more detail later on in his Prices and Production (1935). We argue that assumed coordination between consumers and producers, that is, the case, in which the time preference of consumers and investment plans of producers would be in unison, does not guarantee that the structure of production will be in equilibrium; even in an economy with a constant money supply, i.e. an economy with one hundred per cent reserve banking. We show there may be real factors that might prevent the structure of production from being in equilibrium even though the time preference of consumers might have been in unison, in some point in time, with investment plans of producers. Finally, we shall argue the Hayek's condition, which states that increases in the money supply have to increase at "a constantly increasing rate", does not hold if one should take into account the technological progress.
Highlights
One of the very few positive effects of a crisis having occurred1 has been the renewed interest of academics and researchers in theories, the focus of which is to provide the analytical framework and tools that might be, in turn, used to explain and to, at least partly, mitigate the consequences of a negative part of business cycle
We shall argue that assumed coordination between consumers and producers, which is, the case in which the time preference of consumers and investment plans of producers would be in unison, does not guarantee that the structure of production will be in equilibrium, even in an economy with a constant money supply, i.e. an economy with one hundred per cent reserve banking
Austrian Business Cycle (ABC) theory presumes that an economy with the hundred per cent reserve banking will ensure that coordination between consumers and producers cannot be disturbed, guaranteeing a state of equilibrium of structure of production
Summary
One of the very few positive effects of a crisis having occurred has been the renewed interest of academics and researchers in theories, the focus of which is to provide the analytical framework and tools that might be, in turn, used to explain and to, at least partly, mitigate the consequences of a negative part of business cycle. This may be illustrated well on the discussion that occurred among authors Tullock (1987, 1989) and Wagner (1999) on the one hand, and Salerno (1989) and Block (2001) on the other The former assesses ABC theorys usability in explaining business cycles critically, while the latter opposes the critique partly using praxeological framework, which Caplan (1999) refuted entirely. The most notable among these are Keeler (2001), who concludes, that increases in the money supply trigger business cycles; Mulligan (2002) confirms the working mechanism in reallocation of resources that is in line with ABC theory; the same author (2006) using the vector errorcorrection model presents “evidence of cointegration between real consumable output and the cumulative interest rate term spread”
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