The Austrian Theory Of The Business Cycle - A Short Synthesis

Atle Willems, CFA profile picture
Atle Willems, CFA


  • In recent months, the bank lending growth rate has slowed noticeably.
  • With especially bank lending growth for commercial and industrial purposes declining rapidly, this is a timely opportunity to visit The Austrian Theory of The Business Cycle.
  • This article addresses the essence of the theory, highlighting why the business cycle is more than anything else a monetary phenomenon.

Since I first highlighted the decline in the bank lending growth rate here on Seeking Alpha in January, I have written two articles during the last week (here and here) attempting to explain the economic significance of this recent development. With the growth in bank credit granted for commercial and industrial purposes the biggest culprit of this decline, pulling down the growth rate of the money supply with it, this is a timely opportunity to address the essence of the so-called "Austrian" Theory of The Business Cycle.

The roots of the Austrian theory of the business cycle can be traced back centuries. Our focus here will, however, be the theory as initially put forth by Ludwig von Mises and further developed by Friedrich Hayek and others.

Over the years, this theory has been referred to by many names. In his 1912 book, The Theory of Money and Credit, Mises coined it the "trade-cycle theory," a doctrine he stated "is called the monetary or circulation credit theory, sometimes also the Austrian theory" (Mises, 1953, p. 423). I will here refer to it as the Austrian Theory of the Business Cycle or Austrian Business Cycle Theory, as either one is how the theory is commonly referred to these days. The latter name also readily allows us to shorten it to ABCT, an easy to remember acronym.

Though many non-Austrian school economists and non-Austrians have made important contributions to the theory, the Austrian part of the name originates in the fact that it was economists from the Austrian school, most notably Mises, and later Hayek and others, who first developed a coherent theory of the business cycle.

As the name implies, the Austrian theory of the business cycle seeks to identify and explain the underlying fundamental causes of what is commonly referred to as

This article was written by

Atle Willems, CFA profile picture
Atle Willems, author of "Money Cycles", is an analyst with Liabridge Economic Research. He holds a masters degree in finance with distinction from Nottingham University Business School and a BSc in Business Administration from Drake University.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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