What is the Austrian Business Cycle Theory?

Hayek's business cycle theory holds that the cause of the capitalist economic crisis is a cycle theory in which the excessive supply of money leads to excessive consumption and insufficient capital for the means of production.

Hayek Business Cycle Theory

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Hayek's business cycle theory argues that capitalism

Proposed by the famous Austrian economist Friedrich August von Hayek in 1931 in the book "Price and Production". He believes that the monetary factor in the capitalist economy is the decisive cause for the imbalance of production structure. Based on the premise that there are no idle production resources, in the stage of economic expansion, the demand for investment funds in the capital market will exceed savings, and producers will use the bank's expanded credit to expand the production of capital goods, which will lead to the use of some for consumer goods Of the land and labor factors are transferred to the production of capital goods, but when the bank s expanded credit is turned into people s money income by producers, according to Hayek s assumption, people will restore their consumption to normal proportions, This caused the price of consumer goods to rise, resulting in the conversion of factors of production to the production of consumer goods. Once credit expansion is forced to stop, a crisis will erupt. At this time, it may appear that the investment that is underway with bank credit (new construction equipment, etc.) is shrinking or suspended due to lack of capital; or it is expressed as produced machinery and raw materials, which are not sold well due to lack of capital by other capitalists. Prices plummeted. Hayek believes that the fall in prices caused by the crisis will automatically change the downward trend of the savings rate. Once the capital supply is restored and increased, the economy will naturally recover without the need for state intervention.

Hayek used a metaphor to describe his business cycle theory in his book, Price and Production. He believes that after artificially stimulating the currency, it is "as if a nation on an isolated island has partially built a huge machine that can provide them with all the necessities of life, but then they find that they have All the savings and available idle capital were exhausted, so this machine could not produce any products at all. They had no other choice but to temporarily ignore the use of this machine, and had to invest all their labor in no use Capital to produce the food you need every day. "

The Austrian school inherited and carried forward the Vickers theory. Its representative, Hayek, further combined currency and real economy, and specifically explained the cyclical fluctuations of the economy through the mutual influence of the two. Hayek's two important books on the business cycle are "Monetary Theory and the Trade Cycle" (original 1929, English translation 1933) and "Price and Production" (1931). The former focuses on "the causes of cyclical fluctuations" Monetary factors ", the latter examining" changes in the real production structure that constitutes volatility. "

The Austrian school believes that not only changes in the size of the money supply, but also the way money enters the real economy and operates in the economic system, will affect the true variables and the final market outcome. (This "cantillon distribution effect" emphasizes the way money is injected, arguing that money always works, and that it is not neutral in affecting real economic sectors.)

After the injection of money, different commodities are affected to different degrees. Currency affects the real aspects of the economy by affecting the relative price and the time structure of production. It enables resources to be redistributed in different production links. Hayek's theory of capital is derived from his own monetary theory on the basis of the conceptual framework of "roundaboutway of production" by Bombavik, which can be roughly summarized as follows: capital is not a homogeneous inventory, not the same The accumulation of all kinds of things, but a network of interconnections between various items, is a complex structure formed between various components that complement each other. The production process should be regarded as one "stage" after another Eventually, the consumption level has progressed gradually, to a more distant stage. The clutter of non-consumer goods may not necessarily increase final output. If each type of capital investment is to be able to increase the output of final consumer goods, it must adapt to the complete structure of capital that points to the final consumption stage. Investments that do not have such a complete structure are distorted investments that can only cause capital losses and operating losses. The fundamental role of price is that only when it can reflect the relative scarcity of the different types of capital goods (constantly changing), can the capital structure be integrated into a whole, which can show that part of the distorted investment.

Hayek looked specifically at relative prices, explaining why a recession inevitably followed an artificial boom. His analysis starts with the assumption of full employment. The increase in credit derived from the banking system will reduce market interest rates and make them lower than natural rates. Entrepreneurs will be re-allocated by this misinformation to shift resources from consumption to investment. Assuming that the public's time preferences have not changed, the profitability of more roundabout or longer production processes will lead to false expectations. This increase in investment away from consumption will not be sustained. Because with the growth of the production process, a lot of resources are occupied, and the output of consumer goods declines, and prices rise. Consumers need to maintain the existing level of consumption. Therefore, the time structure of production needs to be readjusted to return to more direct production process. If, during periods of artificial prosperity, or during periods of forced savings, profitable investments are now unprofitable, a crisis occurs.

Hayek's business cycle theory inherited and developed the research of the early Austrian school and related scholars. Among them, Menger laid the distinctive Austrian school methodological foundation and basic analysis framework. Prior to Keynes, he considered uncertainty and imbalance. And the theory of money about the nature of money; Mises did his best to incorporate money into the general economic structure, and gave the Austrian school's early theory of business cycles, explaining that because currency has a unique and key role in pricing and production, it shows that currency interference How to cause the unreasonable allocation of resources and how to cause coordination problems; Vickers distinguishes between natural interest rates and market interest rates, and the impact of their inequality on general price levels. Bombardier proposed an analysis framework for detour production.