The Austrian Business Cycle Theory
Hello there again readers and welcome back to Coffee Break Liberty, a blog where we tackle books, news and many other things under the sun where liberty is a guiding principle. If this is your first time here we would like to extend a special warm welcome to you and hope you enjoy yourself while here.
As promised way back in December we have finally gotten around to getting a new post out about the Austrian business cycle theory. The point of this post is to try and be more informative than opinionated… but we are sure some opinions of our own will pop up.
So to start, what is the business cycle? The business cycle is a general term applied to the fluctuations in the market. The market is consistently expanding or contrasting and this is called the business cycle. Many theories as to why this happens have come up over the hundreds of years but one stands above the rest, tried, tested and true. The Austrian business cycle theory was the only theory that proved correct in 2008. None of the other economic theories saw it coming or could explain what happened as it went counter to all they had preached for decades.
The Austrian business cycle tells us that with the artificially set rates on the lending of monies will disrupt the market. Capital will then be invested into sectors that aren’t where the funds should actually be going. Bubbles are made and the bottom eventually falls out as those sectors that were left in the dust now need labor and investment to catch up with the rest. In 2008 we saw this with the large scale building of houses faster than anyone was willing to buy. The lending of the money too was set at a rate that was not the true market value. So investment and labor that should have been spent on other sectors weren’t for far too long. Thus when the time came and investments needed to finally be moved the bubble burst, the funds and labor dried up. When the investment and labor moves, thus causing a rise in unemployment, the recession typically hits then as it just can’t move fast enough. What generally happens then though is that the government will try to counteract the recession by implementing the same policies that got us into the recession in the first place. This is usually done by lowering the rates… what is that definition of insanity again? Trying the same thing over and over again expecting different results?….yikes.
On a side note, the Austrians view the economy as something that shouldn’t be messed with by the government. That it is the consumers and producers that should determine market value of goods and services nothing else. Also that government intervention via the central bank is one thing that really harms the economy overall. Libertarianism, as we have gone over several times before, isn’t the biggest fan of government intervention of anything at all. It’s no wonder that so many libertarians like the Austrian school so much.
Keeping it short and to the point today, or we hope so, we are gonna wrap this one up. Hope it was informative for those of you who are new to this school of thought.
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Keep that coffee warm for us.
LWS
