What causes economic booms and busts?
To understand the answer to this question, we first have to understand the Austrian Business Cycle Theory (ABCT):
- What cause booms and busts? Introduction to the Austrian Business Cycle Theory
- What cause booms and busts? Explanation of Austrian Business Cycle Theory metaphor
- The real story behind the phenomena of booms and busts
One common misconception of the ABCT is that it is about the effects of over-investments in the economy. In reality, the ABCT is more about mal-investments instead. To understand the idea of mal-investment, it is crucial to understand the concept capital structure, which is a distinguishing feature of the Austrian School of economic thought:
- The first step in an economic slowdown?mal-investment in capital
- Overproduction or mis-configuration of production?
To further understand the idea of mal-investment, an example is given: