Accounting for the business cycle: Nominal rigidities, factor heterogeneity, and Austrian capital theory

Capital theory is fundamental to everything else in Austrian economics. It lies at its core, implicit in discussions of monetary policy, the business cycle, the entrepreneur, and the subjectivity of value and expectations. Prior to the Keynesian revolution, it was capital theory for which the Austrian school was most known among mainstream economists. With the advent of Keynesian macroeconomics, interest in capital theory all but disappeared. But it has recently been the subject of increasing attention. After a brief overview of the main ideas in Austrian capital theory (ACT) from its origins and extensions through the middle of the last century, this chapter notes this rekindled interest and surveys recent applications, including its connection to complexity studies, management studies, entrepreneurship, and macroeconomic policy.

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Austrian Capital Theory: Help or Hindrance?

Journal of the History of Economic Thought ◽

10.1017/s105383720000081x ◽

1997 ◽

Vol 19 (2) ◽

pp. 261-285 ◽

Cited By ~ 3

Author(s):

James C. W. Ahiakpor

Keyword(s):

Interest Rates ◽

Capital Intensity ◽

Price Inflation ◽

Capital Theory ◽

Credit Creation ◽

Low Interest Rates ◽

Austrian Capital Theory ◽

Austrian Capital ◽

The Business Cycle ◽

Production Period

Modern Austrian economists employ the Austrian Theory of Capital as an analytical construct with which to interpret policy-induced business cycles and suggest an appropriate remedy. The argument is that the structure of production, particularly the degree of capital intensity or “length of the production period” among different sectors of a non-collectivized economy, depends on the level of interest rates. Low interest rates encourage greater capital intensity in production while high interest rates reduce the degree of capital intensity or roundaboutness. Thus a greater capital intensity encouraged by an artificially low rate of interest created by a central bank's credit inflation must be followed by increased unemployment of labor when interest rates rise again to reflect the ensuing price inflation and the credit inflation stops. Restraint on central bank credit creation is thus prescribed as the remedy for fluctuations in output and employment in the business cycle.

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THE AVERAGE PERIOD OF PRODUCTION: THE HISTORY AND REHABILITATION OF AN IDEA

Journal of the History of Economic Thought ◽

10.1017/s105383721700013x ◽

2018 ◽

Vol 40 (1) ◽

pp. 81-98 ◽

Cited By ~ 17

Author(s):

Peter Lewin ◽

Nicolás Cachanosky

Keyword(s):

Economic Life ◽

Average Period ◽

Blind Alley ◽

Capital Theory ◽

Austrian Capital Theory ◽

History Of ◽

Austrian Capital ◽

Average Period Of Production ◽

The Business Cycle ◽

Value Measure

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Eugen von Böhm-Bawerk’s average period of production, a purely physical measure of ‘roundaboutness’—the length of the production process. For the general case, such a measure is a chimera. But the intuition is strong, and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists, an alternative value measure of roundaboutness has existed at least since John Hicks’s formulation of his average period (AP) in 1939, which, coincidentally, was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him “Duration” (D). Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what it was that the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle.

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