четверг, 9 августа 2012 г.

A rigorous logical exposition of ABCT

I long searched for a rigorous logical exposition of the Austrian Business cycle theory. Since I have not been able to find one, I decided to write such a logical exposition myself. That is what I managed to do. 

1. There is a period of time T for completion of N investment projects in an economy. This means that consumer goods from these projects will only be available after the expiration of the period T.

2.      All the amounts are fixed for the period T.

3. There is an amount of savings of S available over the period T.

4. Due to the policy of the Central Bank the amount of credit Cr exceeds S by ECr (excessive credit) so it is S + ECr.

5. There is R resources (capital goods) in the economy available over the period T. The amount of Rc is allocated to the production of consumer goods during T, Ri is to be allocated to completion of the investment projects. R = Ri + Rc.

6. If an amount of resources Ri was used in the investment projects it would have been sufficient for completion of all N investment projects over the period T.

7. Cr is planned to be used by entrepreneurs to acquire Ri.

8. The amount of resources Rc is only sufficient to produce C consumer goods during T.

9. Entrepreneurs carrying out the investment projects are not aware of the fact that Cr exceeds S, they expect that Ri will be sufficient for completion of their investment projects.

10. The entrepreneurs draw down all the credit and start the projects.

11. Consumers have the amount of money M that is sufficient to buy more than C consumer goods. The excess purchasing power of consumers is equal to ECr. The excess consumer goods that they demand is Ce.

12. Consumers demand Ce consumer goods in addition to C. Rc is insufficient to meet the demand for Ce.

13. Producers of consumer goods during T start competing for Ri with the investment projects. The price of Ri rises. The amount Cr turns out to not be sufficient to cover the boosted price of Ri.

14. Some of the investment projects N must be abandoned.

It needs to be mentioned that this exposition rests on the assumptions of fixed amounts for simplicity. But I think that it will suffice for the beginning.