Roger W. Garrison on the Austrian Business Cycle Theory (ABCT)

Roger W. Garrison is one of the leading Austrian macroeconomists, and he is himself the author of Time and Money: The Macroeconomics of Capital Structure (Routledge, London, 2002), and one of the leading exponents of ABCT.

Here he is giving a useful lecture on ABCT at the Mises Institute. And all the flaws of ABCT are on display: the underlying assumption of full employment, the mythical Wicksellian monetary equilibrium analysis and the fable of the natural rate of interest (equilibrium interest rate).





Terminology

Roundaboutness
Production of capital goods in the production process of consumer commodities is seen as a type of “production detour.” This is the average period of production, where resources are diverted from direct production of consumer goods to production of capital goods. When new investment occurs beyond replacement of old capital, this leads to a new detour (or concertina effect).

Equilibrium interest rate
The market clearing interest rate where supply in loanable funds equals demand for credit. This is essentially Wicksell’s natural rate of interest, and is supposed to be the interest rate where money supply is neutral and does not cause inflation.

Hayekian pyramid
An inverted pyramid used by Hayek to model the structure of an economy. When investment occurs in new capital goods, the resources directed to lower stages of production where consumer goods are produced are diverted to higher stages of production. This causes inflation in the prices of consumer goods as fewer consumer goods are produced.