Wednesday, September 22, 2010

Austrian Business Cycle

I have to say, after listening to the podcast and reading through the power point presentation on the Austrian Business Cycle, I was very happy with the fact that numerous statistics by credible sources were listed. I have often been a critic of the Austrian school of thought because it seems that generally Austrian economists focus on a more theoretical school of thought than one, which is empirical. Empirical evidence, whether it is skewed or not, is for more convincing than any theoretical concept offered. That being said, I was not surprised to discover that the Austrian school of economics is the only one that embraces the concept of liquidation. It was mentioned that "only through the process of converting the malinvestments into productive capital can the foundation for growth be achieved." Hayek himself stated that "The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production." In other words, government creates what the Austrian thinkers call an "artificial boom." The question, however, is does this artificial boom allow for long-term stability in economic periods of growth and downturns? I realize it was the last discussion where we talked about the New Deal, but I think it is important to point out that whether it was a "raw" deal or not, did the idea of government intervening into this bussiness cycle create long-term stability. I would have to argue that it did. Let's look at an example of China where the unemployment we have seen in the United States has also gone overseas. Now, due to the influx of jobs being created in China, many were able to afford goods they once could not. However, when unemployment rose due to the recession in the United States, China has decided to invest in its infrastructure, paying relatively the same wages that unemployed workers had before. A return to a better life for these workers would not have occured under the Austrian bussiness cycle, at least not quickly. After all, "in the long run, we're all dead. Let's look at an example in the United States. From the 1820s onward, there was a recession of drastic measures nearly every eight to ten years. Following the New Deal and World war two, there was great consistency in the economy for the next thirty years. With the economy have to adjust so quickly to new forms, under the Austrian Business Cycle, people are constantly losing out.

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