About: Austrian Business Cycle Theory   Sponge Permalink

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The business cycle describes regularly occurring booms and and busts observed in economic life and the Austrian Business Cycle Theory (sometimes called the "hangover theory" or even shortened to ABCT) is an explanation of this phenomenon. Originally developed by Ludwig von Mises in the 1912 Theory of Money and Credit it was elaborated on by Hayek and others. In one classical rendition:

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  • Austrian Business Cycle Theory
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  • The business cycle describes regularly occurring booms and and busts observed in economic life and the Austrian Business Cycle Theory (sometimes called the "hangover theory" or even shortened to ABCT) is an explanation of this phenomenon. Originally developed by Ludwig von Mises in the 1912 Theory of Money and Credit it was elaborated on by Hayek and others. In one classical rendition:
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  • The business cycle describes regularly occurring booms and and busts observed in economic life and the Austrian Business Cycle Theory (sometimes called the "hangover theory" or even shortened to ABCT) is an explanation of this phenomenon. Originally developed by Ludwig von Mises in the 1912 Theory of Money and Credit it was elaborated on by Hayek and others. In one classical rendition: Banks expand credit well beyond their own assets and by the funds of their clients. This additional credit lowers the interest rate, and stimulates economic activity. Projects which would not have been started before, seem now profitable, creating malinvestment. They increase demand for production materials and for labor and their prices rise, which, in turn, leads to an increase in prices of consumption goods. If the banks would stop the extension of credit, the boom would be rapidly over. To prevent the sudden halt of this boom (and the resulting collapse of prices), the banks must create more and more credit, and the prices will rise even more. But this expansion of credit cannot continue forever. There is no additional capital or labor; there is only more money. The means of production and labor which have been diverted to the new enterprises have to be taken away from others. Society is not sufficiently rich to permit the creation of new enterprises without taking away from others. As long as the expansion of credit is continued this will not be noticed, but it can't be pushed indefinitely. The inflation and the boom can last only as long as the public thinks that the prices will stop rising in the near future. When the public becomes aware, that there the inflation will not end, and that prices will continue to rise, panic sets in. Eventually, people will give up the currency.
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