The Austrian Theory of the Business Cycle: A Critical Analysis in a Schumpeter–Keynes Perspective

The global financial crisis of 2007–2008 and the subsequent Great Recession have led to a renewed interest in the Austrian theory of the business cycle. This interest depends on the fact that the explanation of the origins of the Great Recession necessarily requires a theory in which the financial system represents a source of instability. The objective of this work is to show that the Austrian theory of the business cycle does not represent a valid instrument to explain the functioning of contemporary economies. The fundamental limit of this theory is that it is based on the Wicksellian concept of natural rate of interest as, according to the Austrian theory, crises are the outcome of a disequilibrium between the rate of interest on money and the natural rate. Following the lesson of Schumpeter and Keynes, the article underlines the irrelevance of the concept of natural rate of interest and the impossibility of stating that the Great Recession has been caused by the decision of the Fed to set the monetary rate of interest below the natural rate. Furthermore, the article contains an explanation of the origins of the global financial crisis sounder than that developed by the Austrian school.