Risk Structure of Production in Garrison's Model

Abstract

In Young (2012a), an extension of Garrison’s (2001) graphical exposition of Austrian Business Cycle Theory (ABCT) is developed that models the risk structure (as well as the time structure) of production. However, in that extended exposition, there are problems of interpretation involving changes in the area of the “risk triangle.” Despite this, I believe that the arguments for extending ABCT to systematically consider distortions in productive structures beyond the degree of “roundaboutness” are compelling. In this paper, I develop an alternative extension of Garrison’s graphical exposition that incorporates a risk structure. This alternative improves upon Young’s original by (1) having a representation of risk structure that is straightforward and (2) explicitly introducing a risk dimension to the production possibilities. I apply the risk-extended Garrison’s model to the 2007-2009 U.S. recession.

Keywords: risk, Austrian business cycle theory, Garrison's model, subprime crisis

JEL Classification: E32, E50