Austrian Business Cycle Theory: Mises to Hayek

Why do recessions happen? In Round 6 of Wrestling with Economics, Matt Kibbe and Glenn Jacobs — Knox County Mayor and former WWE wrestler — unpack the Austrian theory of the business cycle, the insight that earned F. A. Hayek a Nobel Prize. While John Maynard Keynes blamed downturns on waves of irrational “animal spirits” among consumers and investors, the Austrian School points to government manipulation of interest rates. Like prices, interest rates send crucial signals to investors about the real state of the economy. When the Federal Reserve distorts those signals, capital flows into bad investments — creating bubbles that inevitably burst. This is why Dr. Ron Paul made “End the Fed” a rallying cry in his 2012 presidential campaign.