Implications from the Austrian Theory of the Business Cycle: Who Cares?

It’s easy to wonder, in regards to the Austrian Theory of the Business Cycle, “who cares?”  And so I would like to mention some of the implications from the Austrian Theory of the Business Cycle.

Recall the Austrian Theory of the Business Cycle teaches that recessions are due to government interference, and are not an inherent market defect.  We can see many failings attributed to the free market, which, in reality, have their root in government interference, especially in the form of loose economic and monetary policies of the Federal Reserve sanctioned by government.

For instance, the decline of entire industries, like paper and steel, for instance , reflects the idea of malinvestment (the boom) followed but a restructuring, including plant closings, jobs getting shuffled overseas, a reduction in output, etc. (the bust).  We’re seeing this in the financial sector now.

In other words, if the interest rate were market driven rather than declared by fiat means, huge declines in industries, in addition to job and plant migration, would be more rare and more gradual.

Unemployment in America would be different.  Recall that during the “dotcom boom,” many were trained in IT jobs, for instance.  Once the dotcoms started going under, there was (and many would say still is in parts of the country) a glut of IT trained professionals without IT employment opportunities.  A similar situation is found with real estate agents: many new ones were trained to meet the demands of the housing boom, but once the bust arrived, many real estate agents struggled to find good work, or got trained in something else, starting a new career (or re-starting a previous one) to respond to market realities.

If interest rates were market-driven, and recessions thusly avoided, employment would not be as chaotic and hectic for many individuals.  Lay-offs and downsizing would occur less frequently.

Many now observe huge price increases in commodities like oil and foodstuffs.

Many point to inflation as a cause, and that is certainly a source.  As the Fed inflates the money supply, prices increase.  This is not an insignificant effect.

Some would indicate that the many different investment markets contribute to price instability, including increases.  These are certainly a huge factor.  Again, artificially low interest rates encourage malinvestment in such markets, driving up prices.  Add to the current situation uncertainty over the dollar as it weakens and very high oil prices (largely due to our Middle East meddling), and you get a flavor for why we have such high commodity prices.  Investors with money to invest want to put it in something they can have faith in, and so commodity prices increase even more than they normally would.

All of these effects, and many more, are implications from the Austrian Theory of the Business Cycle.  So before we start to fix these problems with more government meddling, it behooves us to understand why these problems occur, where they come from, and the relationship between government policy and economic reality.

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Filed under Austrian Economics, Libertarian, role of government

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