Renewed Interest in the Mises-Hayek ABCT

One of the few positive aspects of the back to back boom-busts episodes experienced by the U.S. and world economies is a renewed interest in the Mises-Hayek-Rothbard-Garrison-Salerno or Austrian business cycle theory (ABCT) coming first from the financial press and more recently from ‘mainstream’ macro economists. I recently showed how the renewed interest proved Krugman wrong about Mises and Hayek. For the more wonkish, Nicolas Cachanosky (my replacement at Metro State) and Alex Salter have just released what Pete Boettke calls a “new working paper that EVERYONE must read”, “The View from Vienna: An Analysis of the Renewed Interest in the Mises-Hayek Theory of the Business Cycle”.
The abstract:

This paper analyses the renewed scholarly interest in the Mises-Hayek, or “Austrian,” theory of the business cycle since the 2008 financial crisis. Understandably, the economics profession has broadened its search for the crises’s explanation beyond the standard DSGE framework. Austrian business cycle theory, with its emphasis on the importance of the monetary system for resource allocation and the linkage of consumer demand with producer supply through the coordination of the economy’s structure of production, offers a fruitful realm for productive intellectual arbitrage in business cycle research. After reviewing the post-crisis literature that engages Austrian business cycle theory, we discuss what is being said that is correct, what is being said that is incorrect, and what is not being said that ought to be said. This last category is most important largely due to the fact that the post-crisis literature engaging Austrian business cycle theory has not addressed advances in the theory made since the days of Mises and Hayek. We also present modern work being done on Austrian business cycle theory and highlight three key areas of contemporary economics where Austrian business cycle theory has the potential to do significant work.

The conclusion:

We also suggest how the modern treatment of the ABCT can contribute to different contemporary economic puzzles, like the Phillips Curve with a positive slope [Dynamic Monetary Theory and the Phillips Curve with a Positive Slope, by Adrián O. Ravier] output comovement in small open economies with different exchange rate regimes and the problem of GDP as a trend-reverting or a unit root series. Certainly further research in all these areas is needed. We think that the treatment and layout we present in this paper shows that there are gains of trade to be gained between “Austrians” and “non-Austrians.” This intellectual arbitrage has the potential to expand significantly the explanatory power of modern economics, and should be embraced by all economists, however they self-identify.

My small quibbles with this excellent and timely paper; wish they had incorporated more from Joe Salerno’s recent and excellent extension of ABCT, A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis, into some of their discussion of recent important contributions and Cochran’s “Capital in Disequilibrium: Understanding the “Great Recession” and the Potential for Recovery” in their discussion of the supposed weakness relative to the recession/recovery phase of the cycle.


  1. “you’ll see is a review of the non-Austrian treatment to the ABCT and how the ABCT can contribute to economic problems.”

    the problem is that you misrepresent the modern ABCT by completely erasing the mainstream of the Austrian theory (Salerno, Hulsmann, de Soto, Block), and offering as the only possibility an objectively marginal group around the GMU whose ties to the ABCT are very dubious: Selgin openly concedes he is not an Austrian economist at all, Horwitz is very ambivalent as well. So, your definition of “ABCT” is rather curious and I would say self-serving since it eliminates by a stroke of pen the dominant current of the ABCT.

    “This paper has nothing to do with citing one “group” or another “group.””

    Oh, it has very much, because you promote one group as the only possible face of the ABCT while completely ignoring the other, more influential “group”.

    I am not angry at all, I just think that your approach in this matter is dishonest: you should clearly state that what you describe as the “Austrian school” is one very narrow tradition, that not all the people who call themselves “Austrians” would agree with your definition and your assessment, to reference the work of the influential “Austrians” with whom you disagree, and then, you can explain why Selgin, White or Horwitz are right and Salerno, Hulsmann or de Soto wrong. But, you cannot simply ignore the mainline of the Misesian-Rothbardian modern theory and pretend that only Horwitz and Selgin are the “Austrians”. It’s as simple as that.

  2. Nikolaj,

    No, you didn’t get the point. This paper is not about “Austrian economics” versus “non-Austrian economics.” If you pay attention to the title, you’ll see is a review of the non-Austrian treatment to the ABCT and how the ABCT can contribute to economic problems.

    I’m sorry that our paper makes you feel angry. At least that’s the impression I have from your comments.

    Probably some of the papers/books you mention can be added. But plenty of them are “in-Austrian” debates that we didn’t think would help to the message we want to send to our readers.

    This paper has nothing to do with citing one “group” or another “group.”

    Thanks for taking time to reading our work. I hope that, despite your differences, it was time well spent.

  3. From the paper:

    “Perhaps even more important than the absent discussion of capital theory is the omission on any modern reference to ABCT since its early development. This overlooks work that has been done developing the microfoundations of ABCT and linking it to monetary disequilibrium theory (Horwitz, 2000). Horwitz does not only work on the microfoundations of ABCT, he also connects the theory to the problem of monetary equilibrium and the literature on free banking (Dowd, 1988, 1992, 1993; Sechrest, 1993; Selgin, 1988, 1996, 1997; L. H. White, 1984, 2011).
    Garrison (2001) embodies the ABCT in a graphical model that connects the market of loanable funds, the production possibilities frontier and the Hayekian triangle.11 Garrison’s model, however, is not just a pedagogical exercise to explain the ABCT, but is also a simple framework to put the ABCT next to other business cycle theories like the Keynesian and the monetarist. Garrison’s work has become a central reference that sets the ABCT in the context of modern macroeconomics that the non-Austrian references have mostly overlooked. Thus Garrison (2001) and Horwitz (2000) are the most important modern theoretical expositions of ABCT. Since they elaborate on, and sometimes clear up, earlier statements of the theory, they constitute the new “canonical” works.”

    And this is all: Garrison, Dowd, Selgin and Horwitz. What about Herbener? Salerno? de Soto ? Hulsmann? Bagus and Howden’s critique of Selgin and White? Rothbard’s critique of free banking? Garrison and Horwitz are “the most important modern expositions of the ABCT”!!! “Canonical works”!? What about De Soto 2009? Salerno 2010? Hulsmann, 2008? Again, no wonder Boettke likes the paper so much. I am sure Selgin and Horwitz like it even more.

  4. “Note that the paper is aimed at a “non-Austrian” readership.”

    And this, I suppose, mean that only those Austrian or ‘Austrian’ ideas which are congenial to the mainstream economics should be presented, and those which are not should be ignored in order not to offend the readership. Is that the point?

    • I’d be willing to bet that the point is something more along the point of not getting lost in the details of the theory, when attempting to show how the theory actually applies to the real economy without making any assumptions that are known and admitted to be false. (A trait that is sorely lacking in mainstream models of the economy), if you do it right you can present an overview that encourages the readers to delve into the details, whereas if you slam them with the details you can actually lose those that would otherwise be willing to learn.

  5. Way too much to cover. Nice job. The Ravier paper, which is highlighted, on Upward sloping P-Curve is very important especially with renewed interest in more -inflation to fight unemployment now which has been re-invigorted by Yellen nomination.

Comments are closed.