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

See all articles by Carmelo Ferlito

Carmelo Ferlito

INTI International University and Colleges; Institute for Democracy and Economic Affairs (IDEAS)

Date Written: 2014

Abstract

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

Ferlito, Carmelo, The Natural Cycle: Why Economic Fluctuations are Inevitable. A Schumpeterian Extension of the Austrian Business Cycle Theory (2014). Journal of Reviews on Global Economics, 3, 2014, 200-219, Available at SSRN: https://ssrn.com/abstract=2660140

Carmelo Ferlito (Contact Author)

INTI International University and Colleges ( email )

No. 3, Jalan SS15/8
Subang Jaya, Selangor 47500
Malaysia

Institute for Democracy and Economic Affairs (IDEAS) ( email )

F4 Taman Tunku, Bukit Tunku
Kuala Lumpur, 50480
Malaysia

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