Economic Crisis and Paradigm Shift

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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.

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the rest of the article

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.

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