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The Optimal Austrian Business Cycle Theory

In: Studies in Austrian Macroeconomics

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  • Alexander W. Salter
  • William J. Luther

Abstract

Since Hayek’s pioneering work in the 1930s, the Austrian business cycle theory (ABCT) has been presented as a disequilibrium theory populated by less-than-perfectly rational agents. In contrast, we maintain that (1) the Austrian business cycle theory is consistent with rational expectations and (2) the post-boom adjustment process can be understood in an equilibrium framework. Hence, we offer a new interpretation of the existing theory. In doing so, we also address concerns raised with Garrison’s (2001) diagrammatic approach, wherein the economy moves beyond the production possibilities frontier. Our interpretation might accurately be described as a monetary disequilibrium approach grounded in an implicit general equilibrium framework with positive costs of reallocation.

Suggested Citation

  • Alexander W. Salter & William J. Luther, 2016. "The Optimal Austrian Business Cycle Theory," Advances in Austrian Economics, in: Steven Horwitz (ed.), Studies in Austrian Macroeconomics, volume 20, pages 45-60, Emerald Publishing Ltd.
  • Handle: RePEc:eme:aaeczz:s1529-213420160000020003
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    References listed on IDEAS

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    1. Nicolas Cachanosky, 2015. "Expectation in Austrian business cycle theory: Market share matters," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 28(2), pages 151-165, June.
    2. Stigler, George J., 2011. "Economics of Information," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    3. Dixit, Avinash, 1995. "Irreversible investment with uncertainty and scale economies," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 327-350.
    4. Peter Lewin, 1997. "Hayekian equilibrium and change," Journal of Economic Methodology, Taylor & Francis Journals, vol. 4(2), pages 245-266.
    5. Roger Koppl & William Luther, 2012. "Hayek, Keynes, and modern macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 223-241, September.
    6. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-557, June.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    8. N. Cachanosky & P. Lewin, 2014. "Roundaboutness is Not a Mysterious Concept: A Financial Application to Capital Theory," Review of Political Economy, Taylor & Francis Journals, vol. 26(4), pages 648-665, October.
    9. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    10. Wagner, Richard E., 2012. "A macro economy as an ecology of plans," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 433-444.
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    Citations

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    Cited by:

    1. Simon Bilo, 2021. "Hayek’s Theory of Business Cycles: A Theory That Will Remain Obscure?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 36(Fall 2021), pages 27-47.
    2. Cameron Harwick, 2022. "Unmixing the metaphors of Austrian capital theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(2), pages 163-176, June.
    3. Anthony J. Evans & Nicolás Cachanosky & Robert Thorpe, 2022. "The upper turning point in the Austrian business cycle theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(1), pages 89-97, March.
    4. Nicolás Cachanosky, 2021. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 279-288, June.
    5. Nicolás Cachanosky, 0. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 0, pages 1-10.
    6. William J. Luther, 2021. "Two paths forward for Austrian macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 289-297, June.

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    More about this item

    Keywords

    Austrian; business cycle; macroeconomic fluctuation; structure of production; rational expectations; reallocation costs; B53; E20; E22; E23; E32; E40;
    All these keywords.

    JEL classification:

    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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