Austrian Business Cycle flaws

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    I recently heard a radio host say that the Austrian theory of the business cycle was a good theory but it has some big flaws. He said the theory relies mostly on the part interest rates plays on business owners decisions but neglects the part behavioral economics plays and why people make decisions.

    He said that the Austrian Business cycle theory makes the mistake of saying all information is known and that it relies mostly on the part that interest rates plays on a business owners decisions whether to grow or not to grow their business.

    Does he have an argument here? Would behavioral economics help with understanding the Austrian Business Cycle better?


    Austrian Business Cycle Theory does not assume that all information is known. It rests on the realistic view that people formulate expectations about the future, which is itself uncertain, as the basis for taking action.

    Instead, ABCT argues that monetary inflation via credit expansion alters the pattern of demands in the economy, both by consumers and entrepreneurs, towards a build-up of capital structure at the lower stages to produce more consumer goods and the higher stages to produce more capital goods in extraction industries. Yet, the real resources in the economy are insufficient to accomplish both. Although the build-up of the capital structure can continue for some time, it cannot be completed for lack of resources. Take a look at the essay, “The Austrian Theory of the Trade Cycle,” by Ludwig von Mises in this book:

    And the article by Joe Salerno:

    The insights of behavioral economics are neither necessary nor sufficient to have a theoretical explanation of the business cycle. Here is Peter Klein on the Austrian theory of the entrepreneur:

    Here are additional resources concerning ABCT:


    Thank you for the information Professor.

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