Some Capital-Theoretic Fallacies of Austrian Economics:

Robert L. Vienneau

October 2007

This article demonstrates certain doctrines of the Austrian school of economics are untenable.

The focus is on certain aspects of capital theory undergirding Austrian Business Cycle theory.

Other criticisms of Austrian Business Cycle Theory from Cambridge-Italian economists are briefly surveyed.

This paper demonstrates an entrepreneur may simultaneously classify a capital good into several orders, as orders of goods are defined by Austrian economists. Hayekian triangles are defined. This paper demonstrates that the shape of a Hayekian triangle varies with the interest rate, even if real resources are not reallocated across stages of production. It is demonstrated, by means of an example, that no tendency need exist for entrepreneurs to respond to lower interest rates by reallocating resources from producing low order goods to producing higher order goods, or otherwise increasing the capital-intensity of the structure of production.

Conclusions:

This paper poses a challenge to advocates of ABCT (Austrian Business Cycle Theory) – to either recant their advocacy or to retell their story with correct capital theory. In such theory, no presumption exists that entrepreneurs will systematically direct more resources to producing higher order goods and away from lower order goods when the interest rate is lower.

Whether the details of the ABCT can be reformulated to withstand capital-theoretic critiques remains to be demonstrated.

 

And a full library of criticism of the Austrian School of economic thought can be found at the Critiques of Libertariansim site.

The full article is here.

Some Capital-Theoretic Fallacies of Austrian Economics