Are Structural Fluctuations Natural or Policy-Induced? Analyzing Mises's and Schumpeter's Contributions to Business Cycle Theory

Abstract

The 2007/8 financial crisis and economic recessions, much like the Great Depression of 1929, stimulated an increased interest in macroeconomics in general and business cycle theory in particular. Aside from a renewed interest in the various interpretations of Keynesianism, particular attention was devoted to the Austrian School. In the first half of the 20th century within the broader Austrian camp there existed two well-established theories that, despite their important insights, were neglected by the mainstream economics profession. However, Joseph Schumpeter and Ludwig von Mises—both members of the third generation of Austrian economists—built theories of economic depressions that, despite presenting some similarities on some particular issues, were fundamentally telling a different story. A closer look at their overall theoretical system seems to suggest that their fundamental divergences have their origin in methodological and epistemological questions. Enamoured with static equilibrium analysis, Schumpeter was led to construct a theory of booms and busts that saw these as the natural outburst of a capitalist system that was inherently disruptive and unstable. Mises on the other hand, focusing on the dynamic market process, was led to conceive of booms and busts as the inevitable consequence of systematic intervention into capitalist production by the government and its corollary, the banking system.