The Madness of Monetary Policy The Austrian Business Cycle Theory The Madness of Monetary Policy ECO 473 – Money & Banking – Dr. Dennis Foster D. Ricardo L. von Mises M. Rothbard I. Why are there business cycles? I. Why are there business cycles? II. The capital structure. III. Interest, time and the unsustainable boom.

I. Why are there Business Cycles? Flaw of Capitalism/Market System Observable since late 1700s.Observable since late 1700s. Coincides with Industrial Revolution/Capitalism.Coincides with Industrial Revolution/Capitalism. Something inherent in the market.Something inherent in the market. Will worsen until system collapses.Will worsen until system collapses. K. Marx

Why are there Business Cycles? Flaw of Capitalism/Market System Under-consumption theory.Under-consumption theory. “Excessive spending” causes inflation.“Excessive spending” causes inflation. “Insufficient spending” causes depression.“Insufficient spending” causes depression. –aka, too much saving!!! Need G to stabilize economy!Need G to stabilize economy! J. M. Keynes T. Malthus

No, Really, Why are there Business Cycles? Any theory must explain the following: Tendency towards repetitive cycles.Tendency towards repetitive cycles. “Mammoth” cluster of entrepreneurial errors.“Mammoth” cluster of entrepreneurial errors. Why depression is more intense in K-goods.Why depression is more intense in K-goods. Why retail is the “last and least” to fall.Why retail is the “last and least” to fall.

No, Really, Why are there Business Cycles? Hume/Ricardo & Classical Economics: It’s not markets, but banking that is the key.It’s not markets, but banking that is the key. Banks expand credit and fuel inflation.Banks expand credit and fuel inflation. –Because it is a “fractional reserve” system.  imports,  exports,  gold outflows.  imports,  exports,  gold outflows. Banks get nervous,  credit, causing recession.Banks get nervous,  credit, causing recession. D. Ricardo D. Hume

No, Really, Why are there Business Cycles? von Mises & the Austrians Central bank precipitates cycle.Central bank precipitates cycle. Effect is to  interest rates.Effect is to  interest rates. Leads to unsustainable increase in Investment.Leads to unsustainable increase in Investment. Eventually, the recession comes to correct for this unsustainable path.Eventually, the recession comes to correct for this unsustainable path. Explains all the salient features of cycle. Explains all the salient features of cycle. F. Hayek

How should gov’t. address Business Cycles? von Mises & the Austrians Stop inflating money in the first place!Stop inflating money in the first place! Don’t bail out troubled firms!Don’t bail out troubled firms! Don’t inflate to get out of the depression!Don’t inflate to get out of the depression! Don’t encourage more consumption!Don’t encourage more consumption! F. Hayek What are we doing?

Can’t you just start a new boom when the old one goes bust? “If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.”

The Madness of Monetary Policy The Austrian Business Cycle Theory The Madness of Monetary Policy ECO 473 – Money & Banking – Dr. Dennis Foster L. von Mises I. Why are there business cycles? I. Why are there business cycles? II. The capital structure. III. Interest, time and the unsustainable boom.