An Austrian view of expectations and business cycles

Austrian economists have contributed several important concepts to business cycle theory including: inter-temporal coordination of production and consumption, heterogeneous specificity of capital, non-neutrality of money, and the capital structure of production. Noticeably lacking, however, is a clear theory of expectations. Recent Austrian responses to rational expectations critiques—such as positing a prisoner’s dilemma, heterogeneous entrepreneurs, and adverse selection—try to fill this gap. But much work remains to be done developing an Austrian theory of expectations, one where they are endogenous to the market process and market institutions. This paper explores how people adapt their expectations to changing market phenomena based upon their perceived costs and benefits of doing so. It then applies endogenous expectations to the 2008 financial crisis.     

The Austrian School of Economics: A view from London

The Review of Austrian Economics - This paper explores the intellectual context of the Department of Economics at the London School of Economics and Political Science (LSE) during the 1930s. We...     

The Austrian theory of the firm: Retrospect and prospect

Using as a focusing device the famous arguments of Coase (Economica 4(16), 386–405 1937) and Hayek (The American Economic Review 35(4): 519–530 1945), I sketch in bold strokes what an Austrian theory of the firm would look like. Such a theory would pay serious attention to issues of knowledge, uncertainty, change, and complementarity. I describe a literature in which much of this theory has already been constructed; make connections to closely related literatures in economics and management; and suggest directions for future development.     

Blockchain and investment: An Austrian approach

The Review of Austrian Economics - Investment is a function of expected profit, which involves calculation of the cost of trust. Blockchain technology is a new institutional technology (Davidson et...     

Austrian theories of entrepreneurship: Insights from complexity theory

This paper examines various Austrian theories of entrepreneurship through the lens of complexity theory, more specifically via the concept of a dancing fitness landscape. Problems in many fields (including economics) can be characterized as attempting to find the highest peak on a fitness landscape (which corresponds to an efficient or optimal resource allocation). A rugged fitness landscape is one characterized by many peaks and troughs, while a dancing fitness landscape is one where the peaks and troughs change over time due either to exogenous or endogenous activity. I argue that several key disagreements among Austrian economists can be better understood through the metaphor of a fitness landscape. The implications of this insight for various branches of Austrian economics are also considered. This study is timely as radical Austrian views are starting to percolate into business schools leading to increased debate among management scholars about the precise nature of the entrepreneurial process (Chiles et al. 2007; Sarasvathy and Dew 2008; Alvarez et al. 2010).     

Technology and social change: An approach from nonequilibrium systems theory

Current theories developed in nonequilibrium thermodynamics and other sciences of complexity can be applied to model societal phenomena without reductionism, as these theories describe how complex nonlinear systems behave in a flow of energy far from equilibrium regardless of the nature of the system and the identity of its components. The latest theories provide insight into how such systems evolve over time, and thus afford continuity for the special theories of system evolution formulated in specific branches of natural and social science. In applying the theories to model societal change, an invariance emerges in the patterns of evolution in nature and in history regarding both the general directionality of evolutionary development and its dynamic mode. Technology when translated in widespread changes in social and society-nature relations destabilizes social systems, with the resulting fluctuations finding new types of dynamic stability through reformed or changed societal institutions. Revolutions in the modem age furnish an especially clear-cut example of societal transformation processes and the wide range of possibilities opened by them for conscious human intervention in determining the outcomes. The new insights of the sciences of complexity call for in-depth empirical research to create fruitful and faithful applications in the sphere of history and society.     

Value and capital: Austrian capital theory,retrospect and Prospect

The time is right for a reexamination of Austrian capital-theory. We attempt to capture the essence of Carl Menger’s approach to capital, highlighting the important distinction between goods and the valuable services they yield (implying that goods are valuable only because they yield valuable services) and highlighting also the importance of money in facilitating exchange and production and in providing the means to value them. We look at the capital-theory of Böhm-Bawerk and suggest that, in many respects, this was a wrong turn, although it did set in motion valuable efforts to clarify the importance of the heterogeneity of productive-resources and their growing complexity over time. We examine the production-function, micro and macro, and show that it is logically untenable and useless as an instrument for empirical investigation, and that this has been known for decades. Of the Austrians after Menger, only Mises followed Irving Fisher in focusing on valuation. He did so in the context of explaining the importance of calculation. Mises’s approach to capital has been insufficiently understood and appreciated. By way of conclusion we draw from our considerations to provide a research agenda in Austrian capital theory.     

An Austrian business cycle parable: An educational note

This paper presents a short narrative example intended for use in teaching the Austrian Business Cycle Theory, meant to complement theoretical presentations by presenting an idealized account of an individual entrepreneur operating over time and responding to various possible evolutions of the interest rate. In particular, the similarity from the point of view of the entrepreneur between a reduction in the interest rate due to an increase in consumer saving and a similar reduction due to monetary policy is emphasized. Along with the narrative itself, we discuss the motivating version of the Austrian Business Cycle behind the narrative, as well as offer commentary as explanation for the particular choices made in its construction.     

The Austrian theory of the cooperative firm

This paper draws on Wicksell's Value, Capital and Rent. The (comparative-statics) response of the cooperative to a change in its parameters (capital stock, rate of interest paid on capital stock, and production function) is examined. Severe employment problems may be expected if, in a cooperative setting, the rate of interest is, by macroeconomic management, kept at a relatively low level. Technological progress also may lead to a contraction in employment and even, under some circumstances, cause a decline in output per man. The cooperative is throughout contrasted with its capitalist counterpart.     

The economics of immigration: An Austrian contribution

Any managed migration system will fail to achieve the optimal quantity or mix of immigrants because centrally planning the international labor market suffers from the same epistemic problems that make it impossible to optimally plan any market. In response to the artificial relative price structure, imposed by managed migration systems, the domestic stock of human and physical capital becomes distorted. Managed migration systems also set in motion the dynamics of intervention that lead to further interventions into the economy.     

Earnings,social security legislation and retirement decisions: the Austrian experience

This paper analyses the labour supply behaviour of elderly males in Austria and asks how far it is determined by the characteristics of the Austrian Social Security System. This is of particular interest because old age insurance in Austria is dominated by the public pension plan, so that private pension plans are of minor importance. I argue that from a theoretical point of view the actuarial unfairness of the insurance plan creates a strong incentive to withdraw from the labour force at the minimum retirement age. Secondly, the rising earnings replacement ratio might be responsible for the decreasing average retirement age. These hypotheses are tested empirically. A pooled time-series cross-sections labour force participation model is estimated for single birth year cohorts of elderly males. I find strong evidence for the proposition, that the age-participation pattern might be determined by the incentives created by social security and that the decrease in labour force participation rates over time may be due to the rising earnings replacement ratio. Remaining differences in labour force participation of elderly males may be attributable to cohort population size and to a long run trend.     

The recession of 1990: An Austrian explanation

Conclusion Deficit spending and money-supply expansion do not eliminate recessions. Theycause recessions. This fact will never be understood unless economists and government policymakers stop trying to micro-manage the economy, and start studying what their actions are doing to the structure of production. Heavy inflation of the money supply followed by sharp cutbacks change the rules right in the middle of the game for millions of businesses in the economy. For the last 40 years, government expansionary policies have stimulated industries to create false and untenable investments. These policies are followed by government corrective actions that destroy those same projects—waste the billions of dollars invested in them, and throw millions out of work. Business cycles are not an essential feature of market capitalism. They are the result of government interference with the market. In the misdirection of labor and the distortion of the structure of production during past business cycles, it was fairly easy to point to the places where the excessive expansion had occurred because it was, on the whole, confined to the capital goods industries... In contrast, the present expansion of money, which has been brought about partly by means of bank credit expansion and partly through budget deficits, has been the result of a deliberate policy, and has gone through somewhat different channels... I do not doubt that in a sense we have today the same kind of phenomenon, but the over-expansion, the undue increase of labor employed in particular occupations, is not confined to a single, clearly defined block such as the capital-goods industries. It is now spread much more widely, and the distribution is much more difficult to describe. It is a field I would wish some statistically minded economist would investigate in order to show how the process operated in particular countries. Friedrich A. Hayek