Austrian business cycle theory

I start this article by copying and pasting from Wikipedia:

The Austrian business cycle theory (ABCT) was developed by economists from School of Vienna, included F.A. Hayek and L.V. Mises. It explain the relationship between bank lending, economic growth and massive investment errors that accumulate in the bullish phase of the cycle, exploding with bubble and destroying value.

He argues that an expansion “artificial” of the credit, i.e., not supported by previous voluntary savings, tends to increase investment, given that relative prices have been distorted by the greater mass of money circulating in the economy. These investments, that had not been undertaken without the aforementioned distortion, overuse accumulated capital goods, and sooner or later the artificially low interest rates are arranged in their true level of market, usually very higher than the established by the central banks given the scarcity of capital goods.  This abruptly cuts the flow of cheap credit, and investments that seemed to be profitable with prices inflated now cease to be so:  the crisis breaks out and the natural settlement of erroneous investments is made.

It is a theory that seems to coincide well with the phenomenon that we have lived in 2008 and we are still alive. I like his interpretation of the reasons for the economic crisis like the current one, economic growth based on creating money through borrowing and indebtedness could not last forever, but I disagree with them in his idea of how to prevent them, if you dig a little. They think that a return to a currency system “real” like gold standard would be the solution. As they see the fault in the current monetary system, they think that a retreat could be a preventive.
I don't think so. The gold standard has also its problems, for example the limited existence of gold in the world would be impossible to increase the monetary mass at all according to the needs of a world of growing population . Or finding new deposits of gold could disrupt sharply the monetary system introducing in the market a lot of currency.

I believe that the current system of money as simple purchasing power backed by central banks is valid, although may be it need tweaks.

But the problem of the recession is already there. What interests us is not to seek ways to avoid the next crisis but to solve the current one or at least to make it as smooth as possible and to comes out soon. Let us hope that the monetary authorities and States succeed.

By the way that Spain have an interesting member of the school.
It is Jesus Huerta de Soto. We can see their website at

There in “books” Click in “money” and access to their entire book on the Austrian theory, economic cycles and its analysis of the subject. They are almost 1000 pages.

Browsing it,I see him (and others of the same school) they throw the blame for this crisis to the fractional system of deposit ( banks can provide for example 10 times more than thedeposits they have).

I recover part of what I browsed (Cap 5):
” In the previous chapter we have explained how the banking deposit contract
of money with fractional reserve give to a new money creation (deposits)
and its injection into the economic system in the form of grant of
new credits that are not backed by a natural increase of the
voluntary savings. In this chapter we will study the effects that on the system
economic holds the concession by the banks for new credit (expansion
credit) without the support of voluntary savings. We will analyse the distortions
the expansive process generates, in the form of investment errors,
credit contractions, banking crises and, ultimately, unemployment and recession
in economics.”

Greetings to all and enjoy, or bear, with Austrian business cycle theory

[Via:   Austrian theory at]

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