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.

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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.

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The structure of production reconsidered – Jörg Guido Hülsmann

The Cambridge Capital Controversy (CCC) is sometimes cited as one of the strongest refutation of the Austrian Business Cycle Theory, considered by Mark Blaug as “the final nail in the coffin of the Austrian theory of capital”.

We must first point out that the “reswitching controversy” is empirically refuted. From Zonghie Han and Bertram Schefold (2005) :

An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory

This paper examines the empirical relevance of the capital controversy. The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation. In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function. This paper presents empirical examples for the first time. Thiry-two input-output tables from the OECD database serve as data. As a result, one envelope is found which involves reswitching. Reverse substitution of labour or reverse capital deepening are observed in about 3.65% of tested cases: they involve at least two switchpoints.

Theoretically, Guido Hülsmann, in “The structure of production reconsidered”, had investigated the issue. He explains that the interest rate and the production structure are not necessarily negatively related (i.e., a lower interest rate is related to a lenghtening of the structure of production) even though the interest rate still affects relative spending, as theorized by austrians. He proposes to develop and enrich the theory of the structure of production. He lists 8 possible scenarios, each of them having different implications. He finally investigates the implication of the consumer credit and the variation of monetary conditions. The former simultaneously thins and lengthens the structure of production. The latter has no systematic impact on the structure of production.

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Austrian Business Cycle Theory, par Jesús Huerta de Soto

La théorie autrichienne des cycles économiques (ABCT) est l’analyse, par l’école autrichienne, des cycles économiques , à savoir des phases d’expansion suivies des phases de récession. Peut-être que l’oeuvre décrivant le mieux les effets de la surexpansion monétaire est l’ouvrage phare de Jesús Huerta de Soto :
Money, Bank Credit, and Economic Cycles.
Au vu de la répétition des erreurs du passé et des remèdes inadéquats, il est important de bien comprendre pourquoi les théories environnantes sont inexactes et non conformes  à l’évidence empirique. Tout le contraire de l’ABCT.

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