Introduction

Austrian Business Cycle Theory

Why do booms turn into busts across the whole economy at once? The Austrian answer fits in one model: three linked charts, five stages, and nineteen figures from Paul F. Cwik's introduction, redrawn and animated step by step.

The cyclist and the car

In 2009 a Federal Reserve economist described the economy as a cyclist knocked into a ditch by a passing car: the job of policy is to get him back on the bike. The story is tidy, but it is not a theory. Where did the car come from? Will it come back? Are there other cars?

Modern macroeconomics calls the car an exogenous shock: something outside the model disrupted an observed pattern. In plain terms, the model does not say why the downturn happened, whether it will recur, or how to prevent it.

The Austrian School builds macroeconomics on microeconomic foundations, and it places the source of the cycle inside the system: in money and in the interest rate.

How this site is organised

• Part 1 — Growth. How an economy "goes right".
• Part 2 — The model. The structure of production, the production possibilities frontier and the loanable funds market, combined into Roger Garrison's three-panel model.
• Three scenarios. More saving; a ceiling on interest rates; and a credit expansion — the business cycle itself, in five stages.
• Part 3 — Open problems. Capital theory, many interest rates, and the yield curve.

Every figure has numbered steps. Use the buttons, the arrow keys or Play.