Austrian Business Cycle Theory Without Unrealistic Constructs

Abstract

Austrian Business Cycle Theory (ABCT) purports to explain recurrent clusters of unsustainably lengthy investment projects following episodes of credit expansion by central banks. In this paper, we show that doing justice to the insights behind ABCT requires a disequilibrium-based restatement of the theory and abandonment of unrealistic equilibrium and equilibrium-related constructs. We also sketch the contours of the explanation of the genuine errors that need to be made to set the stage for the unsustainable boom described by ABCT.