An Austrian Perspective on the Great Recession of 2008

St. Lawrence University economist and Reason contributor Steven Horwitz has just published a very interesting looking working paper at George Mason University's Mercatus Center titled "The Microeconomic Foundations of Macroeconomic Disorder: An Austrian Perspective on the Great Recession of 2008." From the abstract:

This working paper makes the case that the Austrian Business Cycle Theory is still relevant especially during this time of financial crisis. The Austrian explanations of the business cycle takes into account microeconomic foundations, which current standard macroeconomics makes little use of in explaining and understanding the dynamics of growth and business cycles. This paper argues that the alternative approach to understanding business cycles and economic growth espoused by the Austrian school of thought sheds a great deal of light on the current recession as well as suggesting ways to prevent future boom-bust cycles.

Download it here.

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  • ||

    Business cycle?
    Sounds like they think the "Great Recession of 2008" is something other than preamble for the coming hyperinflation and The Greater Depression.

  • Don\'t flame me you Austrians!||

    Hmmm.... Let's break this into component parts: The first is the notion that loose money prompted over-investment and a bubble.. That's covered well enough in mainstream "monetarist" economic theory ("Chicago School as some would call it").

    The second is that the micro-level components (housing policy, financial innovation) contributed a significant share. Certainly.

    But these two things taken together do not need to be trumped up as "Austrian" which is why that school of thought (as pleasant as it is to we libertarians) has never mainstreamed. Microeconomics will never be a discipline to challenge Macroeconomics simply because it deals with too much minutia to provide useful theories or mathematical tools.

  • robc||


    For something that doesnt provide "useful theories" it did a damn good job of predicting the housing bubble. Hence we had Rep Paul trying to burst it in 02 and 03.

  • Ben Kalafut||

    And perhaps Reason 'bloggers will also start pointing us to what phlogiston theorists have to say about global climate change.

    Austrians don't have "theories" of anything in the modern--or useful--sense as they are doctrinaire apriorists. They're rather like Marxists, and their beliefs have no predictive and little explanatory power.

    But wait!--Irwin Peter Schiff correctly predicted ten of the last two downturns. And the "decoupling" and hyperinflation might still come. It must be doctrines say it here and here and here...

    Why waste your readers' time with useless garbage?

  • ||

    Way to just make statements and not back any of it up there Ben Kalafut. I'm sure that just convinced everyone here.

  • mark||

    I've always felt that Econ 101 (micro) was the study of market clearing and other clearly defined economic concepts, while Econ 102 (macro) was the study of useless equations and pretending you're actually saying something of value.

  • mark||

    Not that Micro doesn't have its share of useless equations.

  • Arto Bendiken||

    The McNamara fallacy neatly sums up modern mainstream economics:

    "The first step is to measure what can easily be measured. The second is to disregard what can't be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can't be measured easily isn't very important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist."

    (See "You Keep Bringing Up Exogenous Variables!" for the context.)

    By contrast, the Austrian School is a breath of fresh air and founded on much firmer epistemological ground: no impossible quantitative predictions, only self-evident qualitative ones.

  • Ben Kalafut||

    The intrinsic silliness of the Austrian School has already been well-covered. It's ridiculous for this "Mattocracy" character to expect me to write a full essay on a comment page.

    See e.g.
    to get started.

    We're well past the time the libertarian movement should've gotten beyond these fake "economists" who substitute talk arguments for rigor and bluster for modesty.

  • Steven Horwitz||

    You know Ben, you're probably right, given the way all those "scientific" mainstream economists did such a good job advising the various private and public actors over the last decade and all their "rigorous" models did such a good job pricing risk and predicting the consequences of policy. Yeah, us Austrians sure were the ones not knowing what we're doing.

    Less snidely, your view of Austrians comes from reading too narrow a selection. We're not all "doctrinaire apriorists". Some of us actually know what's happening in the world out there and think it matters. We even engage the rest of the profession in the journals and at conferences. Some of us even get published in mainstream journals and get chairs from our universities. Lots of phlogiston physicists with those, right?

    Sorry, my snide switch must have slipped back on.

  • ||

  • ||

    And perhaps Reason 'bloggers will also start pointing us to what phlogiston theorists have to say about global climate change.

    Wow, thank you for cutting and pasting this from Paul Krugman's joke of a blog for us.

    Peter Schiff does not speak for the Austrian School and personally I think his hyperinflation and decoupling theses are bunk. A lot of Austrians including Mish Shedlock, Frank Shostak, and Robert Prechter have been predicting deflation for some time now. A couple of years ago, Austrians were some of the *only* economists citing deflation as a possibility.

    But you wouldn't know that because you just listen to Paul Krugman when he tells you to ignore other economic perspectives rather than engage them, don't you?

    The accusation that Austrian theories don't take empirical evidence into account is just remarkably stupid. There's huge evidence in favor of ABCT in the form of the huge credit expansions that have preceded every single asset bubble and subsequent crash.

  • Ass of Catalonia||

    ROFL at as a start in terms of exposing the "intrinsic silliness" of the austrian school.

    Really... Really?

  • Joe Majsterski||

    I remember loving Micro-economics, because everything just intuitively made sense. Macro-economics, on the other hand, was insane. "The Fed does WHAT?!"

  • Sean W. Malone||

    I'm absolutely perplexed as to how anyone could cite mainstream neo-Keynesianism's econometric models as somehow more "empirical" than analysis of real data culled from history.

    Apparently fantasy and bad predictions are now facts, and what actually happened is a myth...

    PS, I thin Mish is wrong about deflation across the board, of course it will come in the housing sector, but the Treasury has already monetized some $108 Billion as I recall, or is trying to, and we're looking at some estimates of the total Federal Reserve helicopter drop being around $4-5 Trillion. If that won't produce some serious inflation in the next 5-10 years I have no idea what would.

  • Paul N.||

    I was first introduced to the Austrian School through Peter Schiff, and while I was intrigued by arguments, quickly found better Austrian economists to follow. He doesn't speak for the school, and rarely engages in intelligent debate (rivaling Paul Krugman). He also doesn't address the holes in his arguments, and never discusses past mistakes. I still listen to him from time to time. But once again, Schiff does not speak for the Austrian School.


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