In our time, the most important contribution of the Austrian School of Economics is its unique theory of the business cycle. Rather than viewing the familiar boom-bust pattern as a necessary feature of capitalism, the Austrians blame it on the artificial expansion and contraction of bank credit. This process is exacerbated in modern times by the presence of a central bank, which is the Federal Reserve in the United States.
The Austrian theory of the business cycle was developed by Ludwig von Mises. His follower Friedrich Hayek won the Nobel Prize in 1974 (in part) for his elaboration of Mises’ explanation.
In a nutshell, the Austrian theory says that the way to understand economic recessions and depressions is by turning attention to the prior boom period. It is during the boom period when unsustainable investments are made, which ultimately must be liquidated during the bust.
In a typical cycle, the central bank will artificially lower interest rates by buying assets and flooding the banking system with new money. The lower interest rates are indeed a “stimulus” to investment and consumer spending, but the prosperity is not genuine, because the amount of true saving has not increased. The central bank can keep the illusory boom going for several years if it continues to provide easy credit, but ultimately reality reasserts itself.
The boom typically ends when rising prices causes the authorities to pull back on the monetary inflation, causing interest rates to rise and thereby rendering many projects unprofitable. At the higher interest rates, business owners realize they had been overly optimistic and begin laying off workers or shutting down altogether. The euphoric boom period turns into a miserable recession.
In the Austrian analysis, the way to avoid painful recessions is to avoid the preceding boom. That means during a recession, it is bad policy to slash interest rates and try to stimulate spending—which is of course the textbook “Keynesian” prescription. According to the Austrians, trying to ease the pain of the bust through the use of inflation and cheap credit will simply sow the seeds for the next bust.
In this post we have provided just a sketch of the Austrian theory of the business cycle. The following is further reading.
- To see the Austrian theory applied to the mid-2000s housing boom, and to the subsequent policies by the Bernanke Fed, read Lara and Murphy’s book, How Privatized Banking Really Works (2010).
Ever since the Panic of 2008 vindicated the warnings of the Austrian School of economics, and with Ron Paul bringing this venerable school of thought before a national audience, there has been a revival of interest in the oldest continuously existing school of economic thought in the world.
When students encounter it, they know this is the real thing.
Here at Liberty Classroom, in addition to our courses in U.S. history and Western civilization, we’ve developed a full-blown course in Austrian economics, instantly downloadable so you can learn in your car or on your mobile devices. We also have a course that critiques a popular mainstream college economics textbook, chapter by chapter, from an Austrian perspective. We have discussion forums and live Q&A sessions where you can get your questions in Austrian economics answered.
In addition to those courses, we’ve also assembled this free resource list to help beginners embark on a program of self-education in the Austrian School. We have marked a few titles with ** to indicate their importance.
Many of the books and audiobooks, in addition to all of the articles, that appear on the list below are available to read or listen to online.
An Introduction to Economic Reasoning
These books, all relatively short and available online or for purchase, are an excellent starting point for an education in sound economics.
**Economics in One Lesson by Henry Hazlitt; online here and here (.pdf)
**Choice: Cooperation, Enterprise, and Human Action, by Robert P. Murphy
Essentials of Economics by Faustino Ballve; online here (.pdf)
An Introduction to Austrian Economics by Thomas C. Taylor; online here and here (.pdf)
Lessons for the Young Economist (for younger readers) by Robert P. Murphy; online here, here (.pdf) and here (ebook)
Another easy-to-understand introduction to economic reasoning is Peter Schiff’s book How an Economy Grows and Why It Crashes.
A useful companion to Hazlitt’s Economics in One Lesson is the series of videos produced by the Mises Institute in which various professors comment on each of the book’s chapters – explaining the argument, elaborating on it, and applying it to present conditions. Here are all those videos combined into one mega-video:
Additional Introductory Reading in Economics
The Concise Guide to Economics by Jim Cox; online here and here (.pdf)
Making Economic Sense by Murray N. Rothbard
Free Market Economics: A Reader by Bettina Bien Greaves
Free Market Economics: A Syllabus by Bettina Bien Greaves
The Politically Incorrect Guide to Capitalism by Robert P. Murphy
The Church and the Market: A Catholic Defense of the Free Economy by Thomas E. Woods, Jr.
Whatever Happened to Penny Candy?by Richard J. Maybury (great for homeschoolers)
The Revolution: A Manifesto by Ron Paul, ch. 4
Foundations of Economics: A Christian View by Shawn Ritenour (a very good textbook in economics with a Christian angle, but thoroughly Austrian/Misesian)
**What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar by Murray N. Rothbard
**The Ethics of Money Productionby Jörg Guido Hülsmann (should be read after the title above); .pdf here
Gold, Peace, and Prosperity (.pdf) by Ron Paul; mp3 audio
“Money, Banking, and the Federal Reserve” (documentary, via Google Video)
The Case for Gold by Ron Paul and Lewis Lehrman
Money: Sound and Unsound (advanced) by Joseph T. Salerno; online here (.pdf) and here (ebook)
The Case Against the Fedby Murray N. Rothbard (.pdf here)
End the Fed by Ron Paul
The Revolution: A Manifesto by Ron Paul, ch. 6
The Gold Standard: Perspectives in the Austrian School, ed. Llewellyn H. Rockwell, Jr.; .pdf here
A History of Money and Banking in the United States by Murray N. Rothbard; .pdf here
“The Myth of the ‘Independent’ Fed” by Thomas J. DiLorenzo
Did Greenspan Deserve Support for Another Term? (.pdf) by Joseph T. Salerno (mp3 audio)
“The Path to Sound Money” (mp3 audio) by George Reisman
“The Economics of Inflation” (mp3 audio) by George Reisman
The Business Cycle
**The Austrian Theory of the Trade Cycle and Other Essays (online here; audiobook here).
Meltdown by Thomas E. Woods, Jr.
America’s Great Depression, 5th ed. (pdf here) by Murray N. Rothbard
Time and Money: The Macroeconomics of Capital Structure by Roger W. Garrison
“Business Cycle Primer” by Llewellyn H. Rockwell, Jr.
“My Reply to Krugman on Austrian Business Cycle Theory” by Robert P. Murphy
“Sound Money and the Business Cycle” by John P. Cochran
“Who Predicted the Bubble? Who Predicted the Crash?” (.pdf) by Mark Thornton
“Mises vs. Fisher on Money, Method, and Prediction: The Case of the Great Depression” (.pdf) by Mark Thornton
“Predicting Booms and Busts” (mp3 audio) by Mark Thornton
“Banking and the Business Cycle” (mp3 audio) by Joseph T. Salerno
Austrian Theory of the Trade Cycle (a graphical representation of the Austrian theory) by Roger W. Garrison
Articles and Monograph:
“Deflation and Depression: Where’s the Link?” by Joseph T. Salerno
“Apoplithorismosphobia” (.pdf) by Mark Thornton. (Thornton coined the term to refer to the fear of deflation.)
“An Austrian Taxonomy of Deflation – With Applications to the U.S. by Joseph T. Salerno
Deflation and Liberty by Jörg Guido Hülsmann; audiobook
“On Deflation” by Joseph T. Salerno
“The Economics of Deflation” (YouTube) by Jörg Guido Hülsmann
“The Gold Standard in Theory and Myth” by Joseph T. Salerno
Advanced Texts in Austrian Economics
Man, Economy, and State: A Treatise on Economic Principles by Murray N. Rothbard
This version also contains the book Power and Market, which had originally been intended as the concluding section of Man, Economy, and State but was released in 1970 as a separate title. The entire text is also available online here. A study guide is available for purchase and online (.pdf).
Human Action: A Treatise on Economics (read online) by Ludwig von Mises
Mises’ magnum opus. A study guide is available for purchase and online (.pdf). I recommend reading Man, Economy, and State first, though some disagree with me.
Money, Bank Credit, and Economic Cycles (.pdf) by Jesús Huerta de Soto
A sweeping and historic contribution to the literature of the Austrian School, showing how monetary freedom avoids the disadvantages of fiat money, including inflation, business cycles, and financial bubbles.
Foreign Aid and Development Economics
Equality, the Third World, and Economic Delusion by Peter Bauer
From Subsistence to Exchange and Other Essays by Peter Bauer
“The Marshall Plan: Myths and Realities” (.pdf) by Tyler Cowen
The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics by William Easterly
“The History of Foreign Aid Programs” (mp3) by Thomas E. Woods, Jr.
(These critiques of development aid are not specifically Austrian, but may be of use to those interested in Austrian economics.)
Additional Readings in Austrian Economics
The Economics and Ethics of Private Property by Hans-Hermann Hoppe
A Theory of Socialism and Capitalism (read online) by Hans-Hermann Hoppe
Economic Science and the Austrian Method (read online) by Hans-Hermann Hoppe
Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics (read online) by George Selgin
Our own course in Austrian economics is organized as follows:
I. Scope and Method of Economics
Method of Economics
Scope of Economics: Human Action
II. Laws of Personal Action
Implications of Human Action
Laws of Utility
The Law of Returns
III. Laws of Voluntary, Interpersonal Action
The Division of Labor
The Unhampered Market Economy
Prices of Consumer Goods
Prices of Producer Goods
Profit and Production Decisions
Equity and Investment Decisions
The Capital Structure
Competition and Monopoly
The Time Market: The Rate of Interest
Income: Sources and Disbursements
The Money Market: The Purchasing Power of Money
IV. Laws of Involuntary, Interpersonal Action
Booms and Busts
Money and Banking
Monetary Policy: Monetary Inflation and Credit Expansion
The Business Cycle
Interventionism: Price Controls
Interventionism: Product Controls
The Mixed Economy
The Command Economy: Socialism and Fascism
Each lecture is available in video or audio format according to your preference, and each is accompanied by a PowerPoint presentation and recommended readings drawn from classic texts in the Austrian canon. Join us for this and all our other material today! New members can take $20 off an annual subscription with coupon code SMASH (all caps), or $100 off a lifetime subscription with code MASTERY (all caps).