Just wanted to add a few points to the discussion that borodog has written about elsewhere but that I found were critical in my own acceptance of the ABCT.
The Austrian school of economics puts great emphasis on the entrepreneur’s role in society. The successful entrepreneur is one who repeatedly, successfully navigates uncertainty and allocates resources to most aptly meet consumer demand. They are highly skilled at forecasting future market conditions since by its very nature production must occur prior to sale. Why then do so many get “tricked” by credit expansion? Why is the revered entrepreneur all of a sudden so dumb?
First of all, though entrepreneurs are indeed highly skilled, normal market uncertainty doesn’t necessarily require an understanding of macroeconomics – especially Austrian theory. Indeed, for entrepreneurs to not be tricked would require that they believe that the credit expansion is not borne of real savings, not in accordance with underlying consumer time preferences, and will necessitate that a great many investments made during this period must fail for lack of real resources. Given that mainstream thought has not accepted these theories, it is understandable that otherwise talented entrepreneurs would be “tricked.”
One objection I had to this line of reasoning is – why doesn’t the profit/loss mechanism select for those entrepreneurs most likely to not be fooled by a credit expansion? After all, in all other areas of uncertainty only those businessmen who continuously earn profits keep their capital – the market selects against those who waste resources. It seems this should hold even for those who waste resources due to their ignorance of the implications of credit expansion. I suspect one reason for the market’s inability here is the obligatory bailouts that always seem to follow a bust. Undoubtedly this restricts the market’s natural selection of profitable entrepreneurs.
Further, as Borodog has suggested before, even if entrepreneurs completely accept the necessary consequences of artificial credit expansion they are caught in a prisoner’s dilemma. Ideally everyone would refrain from partaking in the artificial expansion, but if everyone else refrains then there is tremendous incentive to “cheat” and take the cheap credit and profit for yourself. Conversely, those who refrain from accepting the cheap credit will still bear some of the burden of the bust should others accept the artificial credit. Here is an interesting article on this idea:
http://www.gmu.edu/rae/archives/VOL1...p;dempster.pdf
Regardless of the reasons why entrepreneurs accept and bankers provide the artificial credit, empirically we know that they do. Given that they do, the Austrian business cycle theory is the logic of what necessarily must follow. This is what helped me grasp the importance of this theory – so long as artificial credit is successfully expanded the ABCT applies. Productive investment can only come from real savings – deferred consumption. At any one time there is only a fixed amount of real resources. If investment is expanded without the requisite deferral of consumption (indeed savings is even further reduced as artificially lower interest rates serve as a disincentive to save while stimulating investment) then the bulk of these projects must eventually be revealed as unprofitable. The real resources required for their completion simply don’t exist.