Reproduced by kind permission of the Quarterly Journal of Austrian Economics
ABSTRACT: This paper contrasts mainstream analysis of the recent boom/bust episode and its massive interventions with Austrian business cycle theory (ABCT). Mainstream economists remain lost in the Keynesian jungle, and economists in the vein of Irving Fisher, Milton Friedman and Martin Feldstein have not helped. The blinkered approach favored by the economics profession ignores the business cycle theory pioneered by Ludwig von Mises and deepened by successors like Murray Rothbard and Jesus Huerta De Soto. Defying standard economic theory, economists implicitly believe that artificially low interest rates (wrong prices) and debt piled on debt unbacked by real savings do no harm to resource allocation and employment. Attempts to hasten economic growth via monetary policy must prove self-defeating by seducing businesses to overinvest in higher stages of production and underinvest in lower stages. The recession is the realignment of the production structure with consumer wants. “Without a sound capital theory, macroeconomics is incomprehensible,” as Larry J. Sechrest wrote.