Alternative Perspectives on the Global Financial Crisis
Edited by Steven Kates
Chapter 6: The Microeconomic Foundations of Macroeconomic Disorder: An Austrian Perspective on the Great Recession of 2008
6. The microeconomic foundations of macroeconomic disorder: an Austrian perspective on the Great Recession of 2008 Steven Horwitz Modern neoclassical macroeconomics has taken on the air of what John Kenneth Galbraith decades ago termed ‘the conventional wisdom’. In particular, since Keynes, the economics profession has taken for granted a broad vision of macroeconomics that looks for the explanations of both booms and busts in the movements of various aggregate variables. The whole sub-discipline of ‘macroeconomics’ is premised on the belief that the standard microeconomic tools are not of much use in understanding the dynamics of growth and business cycles. Even with the rational expectations revolution purporting to set macroeconomics back on microfoundations, the language of aggregate supply and demand, oversimplified versions of the quantity theory of money, and the aggregative analytics of the Keynesian cross and simple models of functional finance still fill the textbooks and inform most policy debates. As we find ourselves in a significant recession that none of these models foresaw, nor seem to be of much help in extracting us, other approaches to macroeconomics have an opportunity to fill the explanatory vacuum. The Austrian school is uniquely positioned to fill that gap, as Austrians have long rejected the fundamental assumptions of modern macroeconomics and have developed an alternative approach to business cycles and economic growth that sheds a great deal of light on the current recession as well as suggesting ways to prevent future boom–bust cycles. AUSTRIANS AND MODERN MACROECONOMICS For Austrians, the start of...
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