• Unit 6: Business Cycle Theory - I

    Austrian Business Cycle Theory (ABCT) has its roots in the work of Mises and Hayek. Hayek was awarded the 1974 Nobel Prize in Economic Sciences (jointly with Gunnar Myrdal) for some of his work on this theory. Unit 6 looks at the Austrian Business Cycle Theory as first described by Mises. In this theory, we see business cycles as a result of excessive growth in bank credit due to artificially low interest rates set by central banks. In this unit, Saifedean explains how the expansion of credit causes miscalculation, which leads to malinvestment in a boom cycle. This inevitably leads to an unavoidable bust. We end off by discussing the concept of a crack-up boom.

    Completing this unit should take you approximately 2 hours.

    • Upon successful completion of this unit, you will be able to:

      • explain how the market gross interest rate is calculated;
      • describe how interest rates are a measure of capital availability for production;
      • explain how Inflationary credit expansion can lead to illusory profits and less savings;
      • describe how malinvestment is brought about by credit expansion and miscalculation; and
      • evaluate whether a final collapse can be avoided after an economic boom brought about by credit expansion.

    • 6.1: Lecture

      • Lecture Page

        Austrian Business Cycle Theory is an economic theory that describes how the business cycle works. According to the theory, the business cycle unfolds as follows: low interest rates encourage borrowing, which leads to increased capital spending financed by new bank loans. In this lecture, Saifedean explains what the Austrian Business cycle entails.

        Topics covered include:

        • Malinvestment
        • Interest rates and economic calculation
        • How the expansion of credit causes miscalculation
        • The inevitability of a bust after an economic boom

        Key points:

        • Inflation expectations lead to less savings
        • Illusory profits lead to increased consumption
        • Collapse cannot be avoided; the boom should be avoided in the first place
        • The essence of the credit-expansion boom is not overinvestment, but malinvestment
        • Market interest rate is: Originary interest + entrepreneurial risk + price premium
        • Austrian theory does not predict how long a boom will last, only that it will stop when credit expansion stops

    • 6.2: Discussion

      • Discussion Page

        Since you have watched the video lecture for unit 6, it's time to watch Saifedean moderate a discussion on the unit's theme by addressing questions asked by your fellow classmates. As you watch the discussion unfold, take notes to help you retain information. Make sure you watch the entire discussion seminar video; otherwise, you may skip over important points. To get the best learning experience and mastery of the major concepts covered in this unit, you'll want to watch all videos in their entirety.

        Topics discussed include:

        • The Cantillon effect
        • Are we in or close to a liquidation phase of the ABC
        • How the US "exports" its inflation to the rest of the world