I’m starting this article by copying and pasting from Wikipedia:
The Austrian business cycle theory (ABCT) was developed by economists of the Viennese School, including F.A. Hayek and L.V. Mises. It explains the relationship between bank credit, economic growth, and the massive investment errors that accumulate in the boom phase of the cycle, which explode with the bubble and destroy value.
It argues that an “artificial” expansion of credit, that is, one not backed by prior voluntary savings, tends to increase investment, given that relative prices have been distorted by the larger mass of money circulating in the economy. These investments, which would not have been undertaken were it not for the aforementioned distortion, overutilize accumulated capital goods, and sooner or later the artificially low interest rates settle at their true market level, generally much higher than the one established by the central banks due to the scarcity of capital goods. This abruptly cuts off the flow of cheap credit, and investments that seemed profitable with inflated prices now cease to be: the crisis erupts and the natural liquidation of erroneous investments takes place.
It’s a theory that seems to coincide quite a bit with the phenomenon we experienced in 2008 and are still experiencing. I like its interpretation of the causes of economic crises like the current one—economic growth based on creating money through debt and more debt could not last forever—but I do not agree with them on their idea of how to prevent them, if you look into it a little more. They believe that a return to a system of “real” money, like the gold standard, would be the solution. Since they see the fault in the current monetary system, they think a return to the past could be a preventive measure.
I don’t think so. The gold standard also has its problems; for example, the limited existence of gold in the world would mean that the money supply could not be increased at all in accordance with the needs of a world with a growing population. Or, finding new deposits could suddenly disrupt the monetary system by introducing a lot of currency into the market.
I believe that the current system of money as simple purchasing power backed by central banks is valid, although it may need adjustments.
But the problem of the recession is already here. What interests us is not looking for ways to avoid the next one but to solve the current one or at least make it as smooth as possible and exit it quickly. Let’s hope that monetary authorities and states achieve this.
Incidentally, in Spain, we have an interesting member of that school. His name is Jesús Huerta de Soto. You can see his website at http://www.jesushuertadesoto.com/madre2.htm There, under “libros” (books), click on “dinero” (money) and you can access his complete book on Austrian theory, business cycles, and his analysis of the topic. It is almost 1,000 pages long. Leafing through it, I see that he (and others from the same school) blame these crises on the fractional-reserve banking system (that banks can lend, for example, 10 times more than the deposits they hold).
I’m retrieving a part of what I skimmed (chapter 5):
“In the previous chapter, we explained how the fractional-reserve deposit contract gives rise to the creation of new money (deposits) and its injection into the economic system in the form of granting new loans that are not backed by a natural increase in voluntary savings. In this chapter, we will study the effects that the granting of new loans by the banking system (credit expansion) without the backing of voluntary savings has on the economic system. We will analyze the distortions that the expansionary process generates, in the form of investment errors, credit contractions, banking crises, and, ultimately, unemployment and economic recessions.”
Greetings to all, and enjoy, or suffer, the Austrian business cycle theory.
[Vía: la teoría austriaca en relatividad.org]
