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Why it all goes wrong!

Why it all goes wrong!

Why It All Goes Wrong! serves as a short introduction to the Austrian Business Cycle Theory and many important concepts of the Austrian School of Economics.

Why It All Goes Wrong!: A Beginner’s Guide to Booms, Busts & The Austrian Business Cycle Theory

by Gareth Seward

C.A.A.B. Publishing, 112 pp., $8.12

Why it all goes wrong!

Why It All Goes Wrong!: A Beginner’s Guide to Booms, Busts & The Austrian Business Cycle Theory by Gareth Seward is an excellent read for non-economists who want to learn about some of the fundamental theories of the Austrian School of Economics. It first introduces the Austrian Business Cycle Theory, explaining how booms are created and why busts are a necessary consequence of the booms. The monetary phenomena behind this mechanism are shown in a simple-to-understand fashion. The effects of monetary expansion, time preference, interest rates, supply and demand, and price changes are all considered. The book shows why it is crucial to distinguish capital goods from consumer goods when discussing the business cycle. What is also explained is why the booms don’t normally end quickly and why governments often use crisis as a scapegoat to mask the disastrous effects of monetary intervention.

But the book doesn’t stop here. It proceeds to show why the government shouldn’t intervene to prevent or delay the bust. The reason is that such government intervention will make the problem worse and the following bust even bigger. Mr. Seward does a great job arguing why such government intervention is almost always counterproductive, bringing up the minimum wage as an example: despite being based on good intentions, namely raising the standard of living for the people concerned, it leads to many of those same people losing their jobs. He argues that wages are nothing more than a price, and if you create an arbitrary artificial floor on the price, there will be a surplus of supply. And that surplus of supply means that some people will remain unemployed because employers think that what these unemployed people can contribute is not worth the minimum wage. In this way, acting based on good incentives leads to new and often more significant problems than before. This, of course, is something politicians don’t want to acknowledge since their election depends on the appearance of doing something. And that is why governments will not stop meddling with wages and the monetary supply, thereby creating distortions and economic problems.

After looking at the effects of government intervention, Mr. Seward focuses on the most important area of the business cycle: money. In short, if the monetary system is flawed, there will be booms and busts. He brings up both economic and ethical concerns. The effects of an increasing money supply are considered as well as the effects of Fractional Reserve Banking and the gold standard.

The last chapter is dedicated to some misconceptions and criticisms of the Austrian Business Cycle Theory. Mr. Seward summarizes them and then shows why these arguments fail to be substantial criticisms. The first misconception that Mr. Seward dismantles interprets the Austrian Business Cycle Theory as a theory of over-investment. He shows that this is wrong, as the Austrian Business Cycle Theory is a theory of mal-investment, not over-investment. A second misconception holds that the Austrian Business Cycle Theory assumes full employment. However, the business cycle will be set into motion by credit expansion regardless of the level of employment. He also mentions the criticism often raised by Keynesians that the Austrian Business Cycle Theory conflates savings and investments and shows that investments are not possible without savings. The argument that the demand for money is persistently high during a depression, leading to a situation where the natural interest rate cannot drop low enough to stimulate sufficient investment, is countered by arguing that this situation speeds up the readjustment and recovery process. The theory of under-consumption as the reason for the bust period is shown to be wrong because this theory would imply the producer’s goods industries do better in a depression than the consumer’s goods industries. However, in reality, the exact opposite is happening. The acceleration theory is also shown to be false for several reasons: for example, it is argued that the acceleration principle ignores the price system.

Why It All Goes Wrong! aims to give an overview of the Austrian Business Cycle Theory for beginners. It delivers on that but does even more: it serves as a short introduction to many important concepts of the Austrian School of Economics.

Author

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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