This small book presents a number of diagrams with high explanatory power for Austrian economic theory.
This is the diagrammatic representation of ideas of Austrian view of macroeconomic relationships.
The Primary characteristics:
- The capital stock made of heterogeneous capital
- The size of capital stock is treated as variable
- It is not full-employment model even if it assume that process starts with full employment
- The analysis in Austrian model is dynamic and time dependent
- The Austrian theory is theory of coordination: how production process coordinates with tastes of individuals, their time and liquidity preferences.
MY TAKE ON IT:
This is a great set of diagrams clearly demonstrating logic of Austrian theory of business cycle:
- The new credit expands money supply that first goes mainly into hands of capitalists creating incorrect assumption on their part that individual preferences changed to higher level of savings.
- As result capitalists increase investments in long-term projects with time horizon beyond real level of individual preferences.
- When credit increase hit the limit, the gap between consumption demand and investment starves these projects of additional monetary resources causing their suspension or liquidation and economy goes into depression.
- After clean up process completed and failed projects closed, the economy starts growing again.
I mainly agree with this understanding of business cycle with one big caveat: I do not think that money supply is susceptible to control. Neither government nor exclusive use of hard money such as gold could conceivably limit money supply as long as humans can use credit and barter. Eventually money supply is subject to human passions and herd instincts that rise and fall unpredictably so money supply could increase / decrease due to credit expansion / contraction without any change in underlying stock of money either it is gold or accounting entries.
I would also note that individual tie preferences are not constant and could change any time so even if if at the initial planning and investment stage capitalist correctly estimates time preferences at the time, there is no way to correctly estimate future preferences which are clearly unknown.
That means that business cycle will always be with us as long as humans are in control of demand and supply of goods and services.