I am quite new to the site and Mises in general. But i am writing a term paper on his contributions to economics in general and im having trouble distinguishing the difference between Mises’s Austrian Business Cycle theory and the general theory about the Business Cycle. What did Mises Contribute that was different? Thanks
Are you familiar with both?
What “general theory” of the business cycle? There is none. There are multiple competing theories, to the extent that the non-Austrian schools have a theory on this at all.
-Jon
The “general” theory of business cycles is that they are psychological in nature (“animal spirits”, Keynes called them) and are in inherent part of market economies. Investors and speculators suffer from “herd mentality” and “irrational behavior”, causing bubbles for no good reason. The expansion and popping of these bubbles cause the business cycle, as well as greater disasters such as the Great Depression. Hence the need for a Federal Reserve to centrally plan the money supply in order to “smooth out” the business cycle. Obviously, this view puts the black hat on the market and the white one on the government, and justifies severe government intervention in the economy to prevent it from spinning wildly out of control due to greedy speculators.
Austrian Business Cycle states that bubbles are not natural phenomena caused by irrational investors, but artificial phenomena created by government intervention, specifically money creation and artificially lowering the interest rate. These interventions cause malinvestment, i.e. capital goods are directed towards uses other than their most urgent use. For example, artificially lowering mortgage rates directs homes into the hands of people who can’t afford them instead of people who can. The new additional money in the sector leads to an unwarranted rise in values, and eventually these malinvestments are revealed and the values drop. This is what we call the business cycle. This view puts the white hat on the market and the black hat on the government, and strongly opposes severe government intervention in the economy.
Guess which view the government prefers?