Expectations in Austrian Business Cycle Theory: An Application of the Prisoner's Dilemma

The standard account of Austrian Business Cycle theory posits that central bank manipulations of interest rates fool bankers and investors into believing that there has been an increase in the real supply of loanable funds available for capital investment. However, reliance on foolishness ignores the entrepreneurial emphasis within the Austrian tradition and fails to produce the strongest possible case for Austrian Business Cycle theory. We use the prisoner's dilemma framework to model the profit maximizing behavior of bankers and the investors under uncertainty when the market rate of interest is below the underlying rate of time preference.     

Qui docet discit

Academic economists play many roles; researchers, policy advisor, teacher, etc. While each of these roles is important for the career advancement of an economist, the most important role of academic economists is teaching future citizen economists. It is incumbent upon economists qua teacher to prepare them to make sense of the world they will inhabit. We must, therefore, not teach economics, at least at the introductory level, as if it is the first course on the way to a Ph.D., but as if it is the last class the students will ever take in economics. A consistently subjectivist economics is the best way to teach future citizen economists. When students understand economics as something that helps them make sense of the world, rather than a course in applied mathematics, they will be better citizen economists less likely to fall prey to those selling them free lunches.     

Government intervention and the structure of social capital

Over the past decade, policymakers and scholars have devoted increasing attention to the nature and role of social capital in the functioning of society. We examine the implications of government attempts to manipulate the existing structure of social capital to create homogeneity among agents. We find that these attempts can weaken, erode or destroy existing social capital. We conclude with policy implications regarding government efforts to create or manipulate social capital.     

Is the Austrian business cycle theory still relevant?

We compile econometric evidence from the latest available time series data on US savings, consumption, interest rates, and gross domestic product (GDP) to test a reduced form model of the Austrian Business Cycle Theory (ABCT). We build indexes that mimic the gap between the market and natural rates of interest and, using this gap as a proxy for expansionary policy, uncover evidence that changes in reserves lead to changes in real GDP in the manner predicted by ABCT. In addition, we establish that the pattern of endogenous changes in output, from positive to negative, also conforms to the predictions of ABCT. Thus, by incorporating improvements with regard to data and methods over the few other examples of econometric work in this area, we provide more distinctive evidence on ABCT relative to competing theories of the business cycle than has been done previously.

Put me in,Coach, I’m ready to play

This paper explores the connection between discrimination and entrepreneurship. To pursue this inquiry we focus on the integration of black players in Major League Baseball (MLB). MLB team owners, acting as entrepreneurs, had to weigh the benefits of integrating versus the costs of alienating consumers who had a taste for discrimination against hiring blacks. We find that the owners whose teams could profit by contending for the league pennant with the addition of black players were the ones who were willing to take the risk of integrating, although integration often stood in contrast to revealed consumer preferences. In addition to illuminating the mechanism through which integration took place, we offer a general understanding of how the costs and benefits associated with consumers’ taste for discrimination can change via entrepreneurial activities.