Austrian Business Cycle Theory, by Jesús Huerta de Soto

Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, Second Edition.

Chapter 5 : Bank Credit Expansion and Its Effects on the Economic System

The term first-order economic goods has traditionally referred to those consumer goods which, in the specific, subjective context of each action, constitute the goal pursued by the actor in performing the action.

The achievement of these goals, consumer goods, or first-order economic goods, is necessarily preceded by a series of intermediate stages represented by “higher-order economic goods” (second, third, fourth, etc.). The higher the order of each stage, the further the good is from the final consumer good.

This picture might help in better understanding the concept. On the left we have the early stages of production, or stages furthest from consumption. On the right we have the final stages of production, or stages closest to consumption.

Continue reading

Austrian Business Cycle Theory : On the Interest Rate and the Cambridge Capital Controversy

Critics of the ABCT believe that CCC constitutes a strong rejection of the austrian theory of capital. Apart from the empirical evidence of ABCT, one problem with the assumptions of the reswitching theory is that it assumes that ABCT is all about the change in capital-intensiveness following a change in interest rates. ABCT does not even depend on the change in interest rates per se, nor even on a “single” natural interest rate as some wrongly believed; Sraffa being just one of them. But as the reswitching technique theory implies the possibility of capital reversing, which is to say, the association between the nature of the production techniques employed and rate of interest is not a monotonic one. That is, a decline in interest rates might lead to a lengthening in the structure of production through more capital-intensive techniques, when at the same time a further decline in interest rates will trigger a drop in the length of the structure of production through less capital-intensive techniques. In other words, that relationship is an U-shaped.

Continue reading

Root causes of the defects in US Health Care

Some explanations of the problems related to the US health care are listed below. In short, their system is actually not encouraging the customer to discriminate between the different providers, leading to an increase of bad suppliers and services. He thinks that the government will keep under control the market deficiencies such as information asymmetry, conflict of interests, high prices, lower quality and so on. It is not unlikely that the presence of these regulations might have prevented the formation of institutions that would help to reduce market imperfections. This is what we would expect if the fundamentals of a free market economy can be best described by the trial and error process. Economic forces tend to correct for the lack of efficiency in some parts of the economy where the needs of the customer are not fully satisfied because such cases imply some profitable opportunities that capitalists may exploit. Health care is probably not an exception to this rule.

Continue reading