People I talk economics with often dismiss the Austrian business cycle theory out of hand, since the business cycle existed before the Federal Reserve was created. Without the central bank, so the rebuttal goes, interest rates are not held artificially low. Therefore, Austrian business cycle theory would not predict booms and busts without a central bank.
However, in Monetary Theory and the Trade Cycle, the most important work regarding business cycle theory from the Austrians, Nobel laureate Hayek says plainly that a central bank is not needed for booms and busts. He even states that Austrians should not emphasize the central bank in argument (hint, hint Austrians). I found the quote on page 77 of the Mises Institute‘s printing of Prices and Production and Other Works on Money, the Business Cycle, and the Gold Standard. (I would shorten the title…)
“By disregarding those divergencies between the natural and money rate of interest that arise automatically in the course of economic development, and by emphasizing those caused by an artificial lowering of the money rate, the monetary theory of the trade cycle deprives itself of one of its strongest arguments; namely, the fact that the process is describes must always recur under the existing credit organization, and that it thus represents a tendency inherent in the economic system, and is in the fullest sense of the word an endogenous theory.”
One might be excused for not reading Mises’ Theory of Money and Credit or Rothbard’s Case Against the Fed, but Hayek cannot be overlooked by any (even mainstream) economist. While the Austrians might not have everything right, shouldn’t a Nobel prize winner get some respect?
Want to learn more?
- Austrian Business Cycle Theory learning materials (mises.org)
- Free Market Textbooks Reign! (mskousen.com)
- Keynesians Need to Rethink How They Teach Economics (bastiat.mises.org)