Austrian Business Cycle Theory (ABCT)

From: Y
Sent: Monday, February 05, 2018 5:28 PM
To: wblock@loyno.edu
Subject: Inflation and Business cycle
Hi Professor Block, I have a question on money and the Austrian theory of the business cycle. Bitcoin currently has a yearly inflation rate of 3.98% and that will vary predictably into the future. Presumably, any currency including gold that is mined will also have a yearly inflation rate.
Even in a system with full reserve banking and without a government mandated interest rate wouldn’t a business cycle result. Any amount of inflation by itself would have an impact on the interest rate and thus give an incorrect signal to entrepreneurs which will result in the business cycle. Thanks, Y

Dear Y: According to the left wing Samuelson Keynesians, the free enterprise system is unstable, always tending to hive off into either inflation or unemployment, and the best solution to this market failure is fiscal policy. According to the right wing Friedmanite Keynesians, the free enterprise system is unstable, always tending to hive off into either inflation or unemployment, and the best solution to this market failure is monetary policy. According to ABCT, there is no such thing as market failure in this case, or, indeed, in any other. Yes, there will be adjustments, but there will be nothing deserving the appellation of a business cycle under full laissez faire capitalism. When the Fed interferes with the interest rate, it leads investors, as if by an “invisible hand” to engage in unsustainable projects, because the saving decisions of the populace have not thereby changed. However, in the free enterprise system you posit, changes in interest rates will indeed emanate from alterations in the time preferences of the populace. If businessmen are guided by interest rate changes emanating from that source, investors, will not be led, as if by an “invisible hand” to engage in unsustainable projects. Here is a reading list you might want to pursue on this issue:

Rothbard, Murray N. 1963, 1985, 1990 What Has Government Done to Our Money? Auburn, AL.: Mises Institute; http://www.mises.org/rothbard/rothmoney.pdf

Rothbard, Murray N. 1969. “The Austrian Theory of the Trade Cycle,” p. 78-79, in Economic Depressions: Their Cause and Cure, Lansing, Michigan: Constitutional Alliance
http://mises.org/tradcycl/econdepr.asp; http://mises.org/daily/3127/Economic-Depressions-Their-Cause-and-Cure

Rothbard, Murray N. 1996. “Economic Depressions: Their Cause and Cure.” The Austrian Theory of the Trade Cycle and Other Essays. Auburn, AL: The Ludwig von Mises Institute, pp. 37-64. (Originally published by the Center for Libertarian Studies, 1978.) http://mises.org/daily/3127/Economic-Depressions-Their-Cause-and-Cure

Read, especially, the latter of these.

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9:04 pm on February 6, 2018