Austrian business cycle theory

A theory that explains booms and busts as consequences of credit expansion that distorts interest rates, encourages unsustainable investment, and eventually requires economic correction.

Credit expansion: An increase in lending and money creation that expands the supply of credit. The theory begins when bank credit grows beyond saving-backed lending.
Ludwig von Mises: An Austrian economist who developed a monetary theory of business cycles. His work linked bank-created credit to artificially lowered interest rates and boom-time errors.
Austrian School: A tradition in economics emphasizing individual choice, market processes, and capital theory. The business-cycle theory is one application of this school's broader approach.
Keynesian economics: An economic framework emphasizing aggregate demand, output, and employment fluctuations. It often explains downturns through deficient demand rather than prior credit-induced investment errors.
Interest rate: The price paid for borrowing money, usually expressed as a percentage over time. Credit expansion pushes market rates below the level the theory associates with voluntary saving.
Friedrich Hayek: An Austrian-British economist known for work on prices, knowledge, and economic cycles. He elaborated how interest-rate distortions miscoordinate production across time.
Time preference: The preference for satisfaction sooner rather than later, all else equal. The theory treats interest rates as reflecting choices between present and future consumption.
Monetarism: An economic school emphasizing the effects of changes in the money supply on economic activity. Monetarists also stress monetary disturbances but differ over their transmission and policy implications.
Malinvestment: Investment in projects that cannot be sustained given available resources and consumer demand. Artificially low rates make long-term projects appear more profitable than they are.
Eugen von Böhm-Bawerk: An Austrian economist whose work developed a theory of capital and interest. His account of production stages shaped the theory's emphasis on capital structure.

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