~400 words, ~ 2 min reading time
Garrison – The Austrian Theory in Perspective – the Austrian business cycle theory (ABCT) incorporates capital structure in a way that Keynesian and Monetarist theories don’t. While ABCT doesn’t explain everything, it does provide the core theory for why business cycles happen. Details, however, are dependent on history and institutions. Thus, expositions of the theory will vary over time – and should! – as each exposition should reflect the concerns and institutions of the time.
Rothbard “Economic Depressions: Their Cause and Cure” – Any cycle theory should explain (1) the recurrence of business cycles, (2) the cluster of errors that gets revealed in the crisis, (3) the relatively large impacts on capital goods industries. ABCT does this by combining Humean arguments to explain recurrence, Mises’s argument about the information content of interest rates sending a false signal to entrepreneurs, and the relatively larger impact of interest rates on capital goods industries predicted by Austrian capital theory. To cure depressions, the government should refrain from credit expansion (which causes the problem in the first place, and can only prolong the malinvestments by covering up the errors as they grow) and cut back spending (freeing up resources for the private sector). This theory was on the edge of widespread acceptance until Keynes presented his theory – which did not refute Mises’s theory, but simply led many to forget about it.
Hayek’s “Can We Still Avoid Inflation?” – The answer: obviously yes, from a technical standpoint. However, politically, it’s not clear that it is possible, because, in industrialized countries, we have a combination of strong labor unions who will fight any drop in money wages – so that any change in relative wages requires that nearly all wages rise – and a central bank holding to a full employment policy – so they will increase the money supply in response to any increase in unemployment that the unions’ demand for higher wages brings about. [Lucas’s Note: Hayek’s essay is a bit dated. At least in the US, labor unions have seen a significant decline in recent years, and the Fed has developed a more balanced approach to employment and price inflation, and acknowledge that they have more impact on prices than employment in the medium to long run.]