Volume 15, No. 2 (Summer 2012)
Austrian business cycle theory has been criticized on the basis of “rational expectations.” That is, reasonably high quality entrepreneurs—which are required for economic growth—should be able to foresee the business cycle and thereby avoid making malinvestments. As noted by Evans and Baxendale (2008), this argument ignores the fact that entrepreneurs are heterogeneous in quality. American housing data from the past 25 years suggests that entrepreneurs are more likely to make errors when interest rates are unusually low. This suggests that during the boom either entrepreneurs become foolish—or, as suggested by Evans and Baxendale (2008), fools become entrepreneurs.
