Neoclassical economists usually explain their disdain for the Austrian School by saying that, although their theories may seem to be logically and correctly constructed, they lack predictive power; that is why, according to the positivist view, they must be ruled out as "nonscientific."
The current global financial crisis, described in an incomplete manner as the "subprime crisis," has shown, however, that neoclassical theories are not only descriptively false, but also completely incapable of predicting events. In contrast, the Austrian School’s theories, as I will shortly show, not only maintain their realistic approach but also have an important predictive power.
The current crisis fits perfectly with how Austrian economists have explained these events since the beginning of the 20th century. This is easily demonstrated by reference to what might be called the "orthodox version" of the Austrian business-cycle theory (ABCT), as Professor Jesús Huerta de Soto has elaborated it on his book Money, Bank Credit and Economic Cycles.
I do not agree with every point elaborated in this book, but in order to avoid accusations of retrofitting the theory, I will present it without revision or qualification. Even with these exceptions, the traditional Austrian theory is able to explain the main facts of the current crisis, and, being available to all professional economists, it should have enabled them to anticipate and explain this crisis with far greater success than they have had.
January 7, 2009
Juan Ramón Rallo Julián is the director of the Observatorio de Coyuntura Económica (OCE) (Economic Trends Reporter) of the Spanish Instituto Juan de Mariana (site in Spanish and English). He has led important research on the current crisis from an Austrian perspective, publishing several extensive reports that have been covered by the Spanish media. They are displayed (in Spanish) at JuanDeMariana.org.
