ȀȄǿ Partʺ: Economicsearly in the twentieth century and still recited by some Austrians as the
dominant strand of their macroeconomics. Ļe theory blames recession
on a preceding policy of excessively easy money. Artificially low inter-
est rates falsify price signals, exaggerating how much saving is freeing
resources from consumption for real investment. Ļe false cheapness of
credit lures entrepreneurs into otherwise unattractive long-term-oriented,
interest-sensitive projects. In time the scarcity of saved resources for com-
pleting uncompleted projects or operating completed ones forces aban-
doning some of them. Demands for complementary inputs and factors of
production, including labor, fall off. Ļe downturn arrives. Nothing can be
done about the misallocation and waste of resources except to restructure
some of the mistaken projects for whatever alternative uses can be found.
Ļe lesson about not repeating the easy money that may have caused such
distress is often, sadly, not taken to heart.
Ļis scenario, although conceivable enough, finds little historical sup-
port. Overambitious investment projects are typically abandoned or re-
structured not for lack of real resources to complete and operate them
but from disappointingly weak demand for them and for the goods and
services into whose production they were meant to enter. Consider gluts
in the past several years of fiber-optic cable and of houses and high-rise
condominiums.
Strands of the Austrian business-cycle theory may well belong in the
tool kit of theories that researchers may draw on in investigating histori-
cal episodes. Overemphasis on it, however, is an embarrassment that the
Austrian school would well be rid of. (For a fuller critique, see Yeager
ȀȈȇȅ/ȀȈȈȆ, pp.ȁȁȈ–ȁȂȄ.) Excessively easy money can indeed do damage in
various ways, but justified warnings against it had best not be tarred by
association with a questionable one.
঺ŠŕŠšŠŕśŚş
Not everything said here is standard Austrian economics. It does fit in
well, however, with several leading traits of the Austrian school—its
emphasis on the coordination problem, its forthright perception of messy
reality and the scope it leaves for entrepreneurial activities, and its put-
ting money and time at the center of macroeconomics. One further
trait is concern for institutions. It contrasts in this respect with the
hyper-free-marketry of the New Classical and real-business-cycle schools,
which have cultivated analysis of abstract models uncontaminated by