Mainstreaming Austrian Econ

Monday, May 23, 2005
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Funny, but someone putting together a rather mainstrean “analysis” on The Great Depression has found his way to a little Austrian Economics:

“Malinvestment” is a term coined by the Austrian school of economics to sum up their explanation of the causes of business cycles. According to this theory, all business cycles are caused by government intervention in the market. Specifically, the central bank (the Fed in the case of the U.S.) artificially lowers the interest rate, flooding the economy with money. This money is then invested in capital goods that would not be justified at a market level of interest rates. The low interest rate cannot be sustained forever without an increase in inflation, so the Fed inevitably has to raise interest rates. When this happens, the investments that were “justified” under a lower interest rate must be liquidated. Any prevention of this liquidation by further government intervention will simply prolong the re-adjustment and thus exacerbate the recovery. This view is held by very few economists.

He also mentions the Austrian theory of the business cycle here. Not perfect, but cool.

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