If I wanted to quickly explain the Austrian view, I’d begin with the PPF showing the trade-off between investment/saving and consumption. Using that, I’d explain the situation without a central bank. Without a central bank, the people by their preferences establish some point on this frontier. Where they put that point determines what the economy will do. If they have more investment than is required for replacement, we’re building up capital, lowering interest rates, and signaling business to expand their capacity, since current savings indicates less consumption now (hence less resources should be devoted to producing consumption goods) and more consumption in the future, and on more capital-intensive goods. The result is a more roundabout, and hence productive, production cycle.
For example, suppose Crusoe needs to bring water to his cabin for his sick wife. The least roundabout method, but the fastest at present, is to cup the water in his hand. A more roundabout method is to chop down some trees and create a plumbing system. Any observer fully understands if they say “why are you running around with water in your hands?” and he says “because I need to bring water home.” It requires more foresight, though, to understand if we ask him “why are you cutting down trees?” and he says “because I need to bring water home.”
Since he wants the water now - high time preference, high consumption, low savings - he will use his hands.
Now, suppose you somehow loan him some money, or equivalently that the cabin when he found it happened to have water in it already. Then he’d cut down the trees. Why is this better? Because now, once he’s done with that project (say it takes a week) he no longer needs to run around with water in his hands, and can turn his labor to something else, or just consume leisure. By contrast, if he can’t build the plumbing, he has to forever run around with water in his hands.
Fine. Now, the more investment, the more the economy can expand, pushing the PPF outwards. On the other hand, at higher consumption levels, we have slower growth, until we reach the point of full replacement, at which there is no growth. If consumption is even higher than that, we have contraction. This is like not taking any efforts to maintain the plumbing system in the future and having it fall apart, because you’re so busy consuming (say, in the form of leisure) that your investment isn’t high enough to prepare well for the future.
Now, before beginning the plumbing project, Crusoe will need to do a feasibility study. In other words, he checks to see if he has enough water on hand already before beginning, or has an available line of credit, or whatever, so that he won’t run out of water in the middle of his project. If he makes a mistake, then halfway through building the project, he’ll have to abandon it and go back to running around with water in his hands, making what he’s done so far a waste.
Coming back to the real economy, a recession/depression occurs when lots of people make this type of mistake. Why would that happen? On the market, it wouldn’t. To see why this happens, we add the central bank. The bank pushes down interest rates by increasing money supply. On the curve, this is a move upwards on the investment side (more money put into the banks) without any corresponding horizontal move, taking us off the curve. That is, we have too much consumption for the current interest rates. (In fact, consumption will rise, since the money will also flow into consumer credit, and increase house prices, and so on.) This gives the same signal as before, causing businesses to expand their capacity and engage in more roundabout production processes. However, savings has not increased. In the short term, then, we have rising prices, as consumption increases while businesses decrease their output of consumption goods. In the long term, the products made possible through low interest - capital intensive products - come onto market, but do not meet sufficient consumer demand, since savings are down, not up. These products go unsold, causing a fall in prices, businesses to take losses, and so on.
Now, if someone with Krugman’s inadequate grasp of economics reads this, they might jump to the conclusion that the Austrian point is “investment good, consumption bad.” After all, in the first case, more investment means more growth, and in the second, one can say, without being too absurd, that “things would have worked out alright if people had saved more during the boom” although this is not at all the source of the problem. So Krugman reads this view of the business cycle as blaming the bust on too little investment. So, he responds, how can the cause be too little investment? That picture suggests that falling investment causes unemployment - but that frees up money for consumption, so why can’t people work on producing consumption goods?