ECON104: Principles of Austrian Economics II

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