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Systemic Appraisal Optimism and ABC Theory

January 20, 2013
Paper by Robert C. B. Miller ABSTRACT: Austrian business cycle theory (ABCT) has focused on the effect of interest rates set below the natural rate, leading to unwarranted attempts by businessmen to make more elaborate roundabout structures than can be completed by the available foregone consumption. This distorting effect is the main theme of the Austrian capital-based theory of the trade cycle. But interest rates pushed below the natural rate can have another serious damaging effect. They can distort the appreciation of risk. Austrian economists have claimed that interest rates include a risk premium in addition to valuing future over present consumption. It follows that interest rates below the natural rate can create an unwarranted bullishness that leads to systemic “appraisal optimism.” Error prone “marginal entrepreneurs” receive resources which would not have been available to them in ordinary circumstances.

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