Austrian Business Cycle Theory - Influence

Influence

The Austrian explanation of the business cycle varies significantly from the current mainstream understanding of business cycles, and is generally rejected by mainstream economists.

According to Nicholas Kaldor, Hayek's work on the Austrian business cycle theory had at first "fascinated the academic world of economists," but attempts to fill in the gaps in theory led to the gaps appearing "larger, instead of smaller," until ultimately "one was driven to the conclusion that the basic hypothesis of the theory, that scarcity of capital causes crises, must be wrong." After 1941, Hayek abandoned his research in macroeconomics altogether, focusing instead on issues of the economics of information, political philosophy, and the theory of law.

Lionel Robbins, who had embraced the Austrian theory of the business cycle in The Great Depression (1934), later regretted having written that book and accepted many of the Keynesian counterarguments.

The late-2000s financial crisis has resulted in a revival of interest in the Austrian business cycle theory, but has also resulted in a revival of interest of theories more critical of Austrian theory, such as those promoted by Keynesian economics. According to Austrian School supporters, over 25 Austrian School economists are publicly on record as having accurately predicted a housing bubble prior to new home prices reaching their peak in March 2007. Austrian economics received media attention after Congressman and Presidential candidate Ron Paul, was praised by MSNBC's Joe Scarborough for predicting the housing bubble and financial crisis and Paul subsequently appeared on Scarborough's 'Morning Joe' show and credited his understanding of Austrian economics for predicting the financial crisis.