Quarterly Journal of Austrian Economics

Volume 11, No. 1 (2008)

The Austrian business cycle theory (ABCT) has been criticized for not being a true theory of the business cycle. The main emphasis of the ABCT has been on the theory of the upper-turning point—the artificial expansion of credit, the manipulation of interest rates, the malinvestments committed by entrepreneurs and then the credit crunch and/or real resource crunch. The paper provides an illustration (from a corporate finance point of view) of how a company, by following market signals, will launch a project that is a malinvestment. The paper then demonstrates how a company can take a failing component from another business and turn it into a viable operation via the liquidation process. This paper then demonstrates how the Austrian theory can make superior recommendations for policies (through the usage of the liquidation process) to help stimulate economic recovery.