Der Apriorist - Abstracts 06. Oct. 2010

The Austrian Business Cycle Theory in Light of Modern Macroeconomics

by Roger W. Garrison

Tags: business cycle theory
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Garrison, Roger W.. The Austrian Business Cycle Theory in Light of Modern Macroeconomics. The Review of Austrian Economics 3.1 (1988).

Quotes: The Austrian theory of the business cycle has many critics. Some believe that this part of the Austrian contribution is so misdirected as to constitute an "embarrassing excrescence" (Yeager [1986, p. 378]); others simply doubt that there can be a single theory that provides a general account of cyclical activity (Leijonhufvud [1984, 1986]; see also Sirkin [1972] and Lachmann [1978]); and still others deny the existence of some of the most salient features of business cycles.1 Defending—or even discussing—the Austrian theory of the business cycle, then, requires some careful groundwork.

... Section I considers the very existence of business cycles in order to lay the groundwork for evaluating the Austrian theorizing about them. Section II identifies essential differences between allocative distortions caused by legislation and allocative distortions caused by monetary expansion, linking the latter with cyclical characteristics of resource movements. Section III establishes the significance of capital theory in theorizing about the business cycle. Section IV after that provides some justification for the Austrian approach by considering how rival schools theorize in lieu of a theory of capital. Section V offers a summary evaluation.

... Austrians are often criticized for placing too much emphasis on or according too much importance to their business-cycle theory. Why all the attention to nineteenth-century business cycles or to the Great Depression, which in so many respects was a unique historic event? While the Austrian theory does have a direct applicability to these historical episodes, it has broader significance as well. 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. And even more broadly, calling attention to the Austrian theory of the business cycle constitutes an appeal to the economics profession to put capital theory back into macroeconomics.

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