Abstract - The Natural Cycle: WHY Economic Fluctuations are Inevitable. A Schumpeterian Extension of the Austrian Business Cycle Theory

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The Natural Cycle: WHY Economic Fluctuations are Inevitable. A Schumpeterian Extension of the Austrian Business Cycle Theory
Pages 200-219
Carmelo Ferlito

DOI: http://dx.doi.org/10.6000/1929-7092.2014.03.16

Published: 07 July 2014

Open Access 


Abstract: The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit-expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterised by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis.

Keywords: Austrian Economics, Hayek, Schumpeter, Business Cycles, Expectations, Innovation.
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