In case you didn’t click the link when Professor Garrison first blogged this, this Samuel Brittan piece (from remarks delivered in Vienna!) is very interesting. Brittan rejects the Austrian theory of the business cycle on grounds that we didn’t see a “relative contraction in consumer spending” in the 1990s occuring alongside the credit-fueled investment. But as Garrison points out, this is a feature of the Prices and Production version of the theory as presented by Hayek but does not appear in Strigl or Mises.
Brittan writes:
Some analysts have said that the present cycle represents a return to the pattern analysed by prewar Austrian economists. Yes and No. It is true in the rather vague sense that Austrian economists - together with many other venerable dead figures from the past - have pointed to the phenomenon of overinvestment triggering the downward phase of the business cycle. Their works are worth rediscovering if only as an antidote to the exhortations and incentives to invest poured out by governments and international organisations in the recent years.But at a more detailed level, the recent boom and bust does not conform to the analysis, which for instance Friedrich Hayek, used to give before World War Two. In the Hayekan version excessive investment (due to cheap and easy credit) was made possible by a relative contraction in consumer spending. This did not happen in the late 1990s. On the contrary, overseas borrowing, to the accompaniment of large current balance of payments deficits, enabled consumption to go ahead merrily. Austrian economists did not foresee this because like nearly all other economists until very recently, they operated implicitly with a closed economy rather than global models. It would be well worthwhile for somebody trying to reformulate this analysis for a global economy in which large sums of capital flow across the exchange.
