Some of the Serious Questions about the Validity of the Austrian Business Cycle Theory (ABCT)

Many criticisms of ABCT (Austrian Business Cycle Theory) have been made over the last several decades by various people. All of them are invalid. The theory provides the only comprehensive and logically consistent explanation of the cycle. It is the only theory that is consistent with all the facts of the cycle. Nonetheless, since many criticisms have been made, they need to be addressed. I will not address all of the criticisms in this chapter. Many of the criticisms are shown to be invalid in other chapters, such as the claim that ABCT does not explain the contraction phase of the cycle (chapter 3) and the claim that the theory is not based in reality (chapters 3 and 6-9). In addition, some of the criticisms are devoid of intellectual content or are incoherent and therefore require no response.

The only criticisms of ABCT I will address in this chapter are those that are not addressed elsewhere in this book and that raise serious questions about the validity of ABCT. One criticism, on whether ABCT is consistent with what contemporary economists call rational expectations, requires significant treatment to show that this, in fact, is not a valid criticism. Others pertain to claims that ABCT is too complex and that ABCT commits errors in regard to its use of interest rates. Still others criticize ABCT for allegedly requiring full employment at the start of the expansion to generate the harmful effects of the cycle. And there are many more. I address the "rational expectations" criticism last, since it requires a more lengthy treatment.

--Brian P. Simpson, Integrating Theory and Practice, vol. 1 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 87.