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”.
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.
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.