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Tuesday, 4 July 2017

The Austrian Business Cycle Theory: A Defense of Its General Validity

By Mihai Macovei

ABSTRACT: The paper aims to defend the general validity of the ABCT against the assumption that the theory does not hold if entrepreneurs are able to anticipate correctly the inflationary effects of a fiduciary credit expansion. Hülsmann (1998) raises this critique and puts forward a general theory of error cycles centered on government intervention in the economy in order to overcome the perceived shortcomings of the traditional ABCT. The paper analyzes the main implications of this critique of the ABCT in terms of entrepreneurial foresight and the optimal course of action necessary to prevent a monetary induced business cycle, in particular in the context of fractional reserve banks operating under fiat currency. It concludes that within the general framework of human action, entre-preneurs cannot arbitrage away clusters of errors, and the ABCT remains valid. This paper also questions whether Hülsmann’s essentialist approach can be a viable alternative to the traditional ABCT, and find that, despite its merits, the approach can be refuted as a stand-alone theory.

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