Customer Reviews

The Austrian Theory of the Trade Cycle and Other Essays

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A lovely succinct account from four towers in a tradition of economics that is widely represented in the financial markets. Roger Garrison - himself a leading light in modern times - leads off with a brief overview. The nice thing is that Garrison manages to get it all across without resorting to waffle - another Austrian tradition.

In fact, in my view, Garrison is the star of this review since his ability to keep it simple is a tremendous asset. Anyone familiar with the dark mutterings of academics in Austrian academic journals will know exactly what I'm talking about.

Aside from Garrison, the pieces by Rothbard and Harberler are the best since they tackle the central issue of Trade Cycle theory - that any system run by central bankers is inherently unstable since their tinkering with interest rates leads directly to the business cycle. Much better to have a competitive banking system without a central bank and a curency tied to gold. That way credit expansions will never be explosive. Of course, what they don't tell you is that their proposals are inherently deflationary and force deficit countries to do all adjustment when they experience balance of payments problems.

Rothbard's piece sets out the mechanics of the Trade Cycle especially well and everyone should be able to understand what he's getting at without too much difficulty. It's no more difficult than the average economics course on an MBA programme. That's hardly difficult, is it?

Readers wishing to understand the micro-economics of the Austrian school should also check out some of the recent publications of one Israel Kirzner.

I ordered this book as a part of a course I am designing for myself on economics. It is a good introduction to the Austrian school but provides information that even those familiar with the subject will find useful. Rothbard addresses many fallacies regarding the free market and provides a clear explanation of the Austrian theory of the trade cycle and other theories, relating them to history and comparing them with classical and Keynesian theories. This is a helpful comparison, as it reveals some inherent flaws in the latter and outlines the eventual results of the acceptance of those theories. This book does not give an in-depth analysis of its subject, but provides a cohesive picture and points for further examination. It is also a helpful text for understanding capitalist theory and the history of the Austrian school.

With the economy on the brink of a major collapse, there would seem to be no better time than the present to become reacquainted with the Austrian theory of the trade cycle, since this theory is nearly the only one which can come close to explaining the present crisis. Whereas most academic economists, under the influence of Keynes, believe that the economy, if manipulated in the right ways by the central banking authorities, can be kept in a state of expansion indefinitely, the Austrians argued for what has been called, by one critic, the "hangover theory," according to which any attempt to artificially stimulate the economy through a policy of credit inflation and low interest rates is bound to fail in the long run, so that any attempt to prevent a recession by lowering the interest rate can only wind up making things worse. Now while the Austrian theory in all its manifold details may not provide us with an entirely adequate description of economic reality, it is difficult to argue with the premise that artificially lowering the interest rate through easy money policies must lead to serious economic dislocations down the road. The cluelessness in regard to this issue demonstrated by most academic economists and by investment analysts merely proves the inveterate irrationality of the majority of the human race and the tremendous influence of wishful thinking on those who do not have the guts to see things as they are. There is no better introduction to Austrian trade cycle theory than this modest book which includes essays by von Mises, Hayek, Halberler, and Rothbard. The theory is presented in a clear, succinct manner, so that even economic illiterates have a chance to understand it. Roger Garrison provides an excellent introduction and summary.

Although I regard the Austrian theory as the best so far promulgated, this should not be construed as a full-hearted endorsement of the theory. In many important respects, the theory is flawed. Specifically, the theory suffers from two major shortcomings: (1) it is derived entirely from rationalistic speculation based on oversimplified generalizations of economic reality; and (2) it tacitly assumes that human behavior and motivation is far more rational than the facts would suggest. Given these weaknesses, it's not surprising that only the extreme rationalists within the Austrian movement except the theory in toto, and that many who once accepted (including even Haberler, one of the contributors to this volume) later rejected it. Perhaps the main reason for this rejection is the view that what causes the recession (or depression) is misallocation of resources within the capital structure. When interest rates are artificially lowered, this leads (according to the Austrian theory) to over-investment in more durable over less durable capital industries and for temporally more remote rather than less remote stages of production. This part of the theory has not sit well even with those economists who might otherwise be sympathetic to it. This is a pity, because this portion of the theory is not even necessary for explaining the phenomenon of economic recessions. In fact, they can be explained in virtue of credit expansion alone. The key is to merely understand that credit expansion through fractional reserve banking (or the equivalent thereof) is equivalent to debt expansion, since debt is merely the obverse side of credit. But it should be obvious to those whose common sense has not been debauched by too much Keynsianism that expansion of debt through fractional reserves cannot be carried on indefinitely, since debt of this kind is tantamount to leveraged debt and becomes more and more like a ponzi scheme the longer the banking and treasury authorities allow it to go on.

An excellent and important little book. Highly recommended.

At last! An anthology from one of the most important schools of libertarian economics in a portable form! This book can be easily incorporated into a course on economics or banking.
And yet, "The Austrian Theory of the Trade Cycle" is a narrowly useful tool. It's like a tire gauge, that means everything when there's a problem with the tire, but tells nothing about gas or oil levels. I see few times when the average production supervisor, Sunday-school teacher or working mom would have occasion to read it.
In the introduction, Roger Garrison spells out the differences between the Austrian School and other movements in free-market economics. The Austrian School emphasizes the role of time in decision making. To think of an example, Joe wants to buy a car now that the interest rates are low. But if the interest rates are high, he'll put his money in the bank and wait a year until he replaces the family car.
Ludwig von Mises' essay, which lends its name to the book, reveals the international character of the Austrian School. The essay was translated out of the French, points back to the British Currency School, and alludes to the contribution of Knut Wicksell from Sweden. This theory was, nevertheless, developed by Austrians, beginning with Carl Menger. References to the University of Chicago and to the Ludwig von Mises Institute in Auburn, Alabama, bring the movement to a home in America.
The key point is that a boom produced and prolonged by easy bank money with government support will sooner or later contract into a bust when the easy money turns hard. Just ask any farmer who bought machinery on credit years ago, when inflation was rampant.
Gottfried Haberler demonstrates that economics is, in fact, difficult to reduce to mathematics. He points to how money is needed at different times as a product moves out of the ground through its production phases to the end user.
In contrast, Murray Rothbard tells us with sparkling satire why we no longer have "panics" and "depressions." He also gives insight on how a change in time preference changes interest rates; interest rates fall if enough buyers become savers.
Friedrich Hayek points to an insidious effect of inflation. Not is it more fun to be a debtor on a fixed-rate loan when inflation is high, but taxable profits are much higher than the profits are worth in reality. Easy money gives rise to inflation.
Roger Garrison finally draws a couple of price/quantity graphs in his summary, savings/investment graphs to be specific. Money created by the government has the same short-term effect as a genuine increase in savings, but genuine savings are lower because savers are coolly greeted by lower interest rates for their hard-earned money. The bust after the boom is a real let-down.
With my MBA from Campbell, this material is clearer and livelier to me than it would be to the man on the street.

This is a very insightful collection of essays from many of the leading "Austrian School" trade economists. They run from essays in the 30s aimed at countering the wave of post-depression social planning to essays in the 70s arguing against Keynesian economics. The key economic insight across the essays is the temportal nature of the Austrian view of business cycles. An artificially low interest rate (mandated by banks or the central government) increases investment in primary goods. Before the capacity can be deployed, there's an increase in wages, which causes inflation in end products. The only end is a return to sounder money (the gold standard) and a cut back of the credit. The reader could easily extrapolate the market conditions described in the book to the current situation. As for the solution - it hasn't been tried, and unlike the symptoms of the problem (which have had empirical support), nobody knows if a switch to the gold standard will really solve the problem. Either way, the economics described are thought provoking, and worth a look. It is also timely given Ron Paul's support of these policies.

This recommendation does come with a few caveats... Know what you're getting into. This isn't a "Cover all" for Austrian theory. It's a series of essays, none of which can get into tremendous detail. That said, it's very deep. Even for the initiated, much of the book requires multiple reading to critically understand what's going on. Lastly, like most Austrian works, it is heavier on analysis than empirical data.

In all, it is worth the read to help the reader understand an important view of business cycles.

An excellent book that should be required reading for those who are followers of the Keynesian Theory of Economics. This book will show how Keynes' theory is not sustainable in any economy and will do more damage than good.

If you don't know the first thing about economics you might want to read Henry Hazlitt's "Economics in One Lesson" first. This is book is a series of essays by four legendary Austrian economists - Ludwig von Mises, Gottfried Haberler, Murray Rothbard, and F.A. Hayek, and includes commentary by Auburn University's Roger Garrison. This book does an excellent job at explaining the trade cycle, which can be a complex topic. Basically, artificially low interest rates cause unsustainable booms, which lead to the inevitable bust. If there is genuine savings then the market interest rate will naturally be lower, and there will be genuine sustainable growth. Read this book and learn why we are in the current economic mess we are in.

Concise and easy to read. Explains how we got to the current economic crisis and raises questions in my mind about the effectiveness of measures currently being taken to revive the economy.

Short and concise essay describing the real economic process and why business cycle occurs, contrary to unsatisfactory explanation by Keynesian economics. Recommended to read if you are interested in economics.

I'm pretty ignorant concerning economics, so much of this went over my head, but I think it might be about the simplest and most introductory view of the Austrian view you're going to get.