“Austrian” Business Cycle Theory – an “Easy” Explanation
By Duncan Whitmore
Compared to the simple and straightforward siren songs of “underconsumptionist” and “underspending” theories of boom and bust, “Austrian” business cycle theory (ABCT) can seem unduly complex. The former types of theory, associated with “mainstream” schools of economics, at least have the advantage of the veneer of plausibility, in spite of their falsehood. A glut of business confidence and spending will, it seems, naturally lead to an economic boom, a boom that can only come crashing down if these aspects were to disappear. For what could be worse for economic progress if people just don’t have the nerve do anything? Add in all of the usual traits of “greed” and “selfishness” with which people take pride in ascribing to bankers and businessmen (again, with demonstrable plausibility) and you have a pretty convincing cover story for why we routinely suffer from the business cycle. ABCT, on the other hand, with its long chains of deductive logic, can seem more impenetrable and confusing. Is there a way in which Austro-libertarians can overcome this problem? Continue reading
The belief that economic progress is boosted by consumption is based upon the kind of misunderstanding that could be made only by intellectuals – the product of theorising that is completely detached from the common sense that everyone else possesses.
The misunderstanding is based on a conflation of the desire to consume on the one hand with the act of consumption on the other – or, in other words, it confuses motive with cause.
All economic progress is motivated by the desire to achieve consumption – in other words, to satisfy as many of our ends as possible. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. Thus, the bigger our desire for consumption then the greater will be our efforts to speed up economic progress.
However, economic progress is not caused, or brought into being, by the act of consumption. Rather, the act of consumption is the result of economic progress (i.e. of increased production). Actually consuming is what we to do in order to reward ourselves once we have produced something – it is not what we do in order to start production in the first place. Indeed, as is so often the case with realities that are hidden by myths, this truth is intuitive – you cannot consume a good unless it has first been brought into existence by production. Continue reading
The Circular Flow of Nonsense
To all with an A-level in Economics, the Keynesian circular flow of income will be familiar. It is a representation of the macroeconomy, including the household, the firm, the global economy, the banks, and the government.
Injections are often represented on this diagram by a green arrow and they include consumption, investment, government spending, and exports while leakages are often represented by a red arrow and they include savings, taxes, and imports. While consumption is sometimes not included in the list of injections, injections are defined as expenditures on aggregate production, that is, money flowing into firms. On the other hand, leakages are defined as non-expenditures on aggregate production.