Austrian business cycle theory

Overinvestment theories are developed in the first half of the 20th century contributions to economic theory. Differences are the monetary overinvestment theory of Knut Wicksell and Hayek, as well as non-monetary overinvestment theory of Gustav Cassel, Arthur Spiethoff and Joseph Schumpeter.

Knut Wicksell

Wicksell examined the ways in which an economy responds to monetary impulses in balance. He distinguishes between a natural capital interest and the interest of money. The natural capital interest rate is the interest rate at which saving and investment are balanced in a pure exchange economy. It corresponds to the marginal productivity of capital. The cash rate is the interest rate for the loans can be included in the market.

According to the monetary overinvestment theory according to Wicksell, there is an increase in the internal rate of return of the company, ie the " natural rate of interest ", such as technical progress over the existing money rate of interest. On the capital market, the demand for loans to finance new investments. First, the additional liquidity fuels the boom, in the course of which investment projects with lower (expected) returns will be financed. This increased demand for loans is satisfied by the banks, the deposit money will be extended. It increases the demand for physical capital, while supply remains constant. This, together with the growing deposit money to a rising price level, without changing the actual sizes. The inflationary process only comes to an end when banks adjust the interest on money the natural rate again.

Ludwig von Mises

Ludwig von Mises moved the effect of an expansionary monetary policy in the center. So he investigated the case that banks reduce money creation by the money interest rate below the level of the natural rate. The natural rate he assumes to be constant in its analysis. He realized that a monetary stimulus does not act uniformly on the structure of prices. The prices of raw materials and semi-finished products and wages rose earlier than the prices consumer goods closer.

Friedrich August von Hayek

Hayek studied the effect of monetary impulses not only on the economy as a whole, but also how the structure of production is affected. To this end, he extended the models of his predecessors to the production structure model of temporal capital theory. In this theory, the production process time, which is ignored in nichttemporalen theories needs. Hayek is based on a simple linear model in which the consumer goods are produced in a stepwise process. From the production factors labor and land arises capital, which is converted to consumer goods closer by further addition of labor and land. In the final stage and finally emerge from the capital goods consumer goods. In this model, the capital consists exclusively of working capital.

A production detour can be worth it if the production is thereby effectively. That conclusion is contrary to the interest rate, which is why production is lucrative, it takes less time. Therefore, a lower interest rate leads to a more capital-intensive production is favored. If the lower interest real causes, including an increased savings rate, it leads to a larger production. Is it, however, due to increased lending, the demand for capital goods, without that consumer demand falls. This leads to inflation in the medium term. If the banks to expand lending not systematic, they need to raise the interest rate again. The newly created consumer remote production levels become unprofitable again. Investment projects that were profitable nor to the previous deposit interest rate will be canceled. In the absence of intermediates, the consumer-oriented production can only be adjusted with a delay of demand. This leads to unemployment and a general economic crisis.

Proposed countermeasures

According to Wicksell, the central bank would raise rates in time to prevent the over-investment crisis. Even Hayek recommends a timely increase in the benchmark interest rate by the central bank, which but the financial crises could not be completely avoided.

In a later period Hayek blamed the political influence on the central bank for an excessively expansionary monetary policy. He represented then the view that the only way to achieve monetary stability, the denationalization of money is.

Reception

The monetary overinvestment theory was the dominant idea in the period around 1929. U.S. President Herbert Hoover, who largely followed this theory in the Great Depression of the 1930s, later bitterly complained in his memoirs about these recommendations.

Contemporary economists such as John Maynard Keynes and Milton Friedman came to the conclusion that Hayek advocated by Friedrich August policy recommendation of inaction has exacerbated the Great Depression. Milton Friedman recalled that at the University of Chicago as a "dangerous nonsense " was never taught and that he could understand why at Harvard - bright young economists turned away from macroeconomics their teachers and Keynesians - where such nonsense was taught were. He wrote:

" I think the Austrian business -cycle theory has done the world a great deal of harm. If you go back to the 1930s, Which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You've just got to let it cure Itself. You can not do anything about it. You will only make it worse. I think ... by Encouraging that kind of do-nothing policy Both in Britain and in the United States, They did harm. "

"I think that the overinvestment theory of the Austrian school in the world has inflicted serious damage. If you go back in the 1930s, which were a crucial moment, then you see the representatives of the Austrian School - Hayek and Lionel Robbins - sit in London and say that you have to let things get broken. You just have to be self- healing. You can not do anything. Everything you do will only make it worse. [ ... ] I think that they have harmed by the encouragement of inaction, both in England and in the United States. "

The representative of the Austrian School Lawrence White contends, however, that Hayek overinvestment theory not calling for deflation policy. Hayek's ambivalence in the (later confessed to be fatal ) issue of deflationary policies have not specifically been related to the over-investment theory, but with his then hope that deflation will break the wage rigidity.