The Natural Cycle: Why Economic Fluctuations are Inevitable. A Schumpeterian Extension of the Austrian Business Cycle Theory
Journal of Reviews on Global Economics, 3, 2014, 200-219
20 Pages Posted: 15 Sep 2015
Date Written: 2014
The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterized by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis.
Keywords: Austrian Economics, Hayek, Schumpeter, Business Cycles, Expectations, Innovation
JEL Classification: B13, B25, B53, E32, D84
Suggested Citation: Suggested Citation