Wednesday, May 15, 2013

Important Affinities and Distinctives between Real Business Cycle Theory and Causal-Realist Economics

John P. Cochran has an excellent article discussing some similarities between real business cycle (RBC) theory and Austrian Causal-Realist explanations of recessions in general and the Great Depression in particular published on

Cochran notes that
some of the results developed by RBC proponents, can supplement the Austrian business cycle theory (ABCT), and add to our understanding of cycle phenomena and other fluctuations in economic activity (see “Capital-Based Macroeconomics: Recent Developments and Extensions of Austrian Business Cycle Theory” or “Capital Based Macroeconomics: Boom and Bust in Japan and the US”).
Note that he thinks that some insights from real business cycle theory can supplement--not replace--the Austrian Theory of the Business Cycle. This is because only the Misesian theory incorporates both money and the capital structure, the two things that integrate the entire social economy.

Therefore, real business cycle certainly leaves some things out and is therefore weaker for it. Cochran notes:
While business cycle phenomena may be caused by exogenous shocks or inappropriately tight monetary policy, much of the actual cyclical activity is best interpreted as the consequence of credit-created unsustainable growth. This type of cyclical activity is preventable with an appropriate monetary framework, but may be difficult to correct with short-run macroeconomic policy. A monetary policy based on the principle of sound — not stable — money would accommodate sustainable growth without generating endogenous instabilities and unsustainable growth.

1 comment:

  1. Thanks for making this comparative study between real business theory and casual realistic economics. This is very informative article.

    William Martin

    Financial Claims Made Simple