Ethan Ridings 1

SPECIFIC PURPOSE: To inform my audience about the Austrian School of Economic

Thought
Introduction:
Not too long ago we experienced one of the largest downturns of the American economy
since the great depression. The labor market lost over 8 million jobs and unemployment
spiked at over 9% (BLS). This could have all potentially been avoided if we would have
just listened to the Austrian School of Economics. The Austrian School of Economic
Thought is a theory of economic interactions and markets. They believe the condition of
the economy is up to the individual. They have a strict view of government intervention
and how the government impedes expanding markets. It also describes the negative
effects of government manipulated interest rates through its business cycle theory.
MAIN POINTS:
1. The economy relies on each and every individuals actions.
a. These actions are inherently unpredictable, so Austrians focus a lot on how
humans interact with each other.
i. Governments cannot know what the individual goals are of their
people and that the government also doesnt know how to achieve
the goals of their people (Boettke, 2008).
ii. In 1949, Ludwig Von Mises, the father of the Austrian School of
Economics, published his most famous book, Human Action,
which completed his theories on economics and individualism
(Butler, 2010).
b. The value of goods and services are different for each person (Greaves
1996).
i. Different incomes, ages, genders, geographical areas etc. call for
different values.
2. Interest rates signal businesses when to invest and when not to
a. When interest rates are high, consumers arent saving a lot of money.
When interest rates are low, consumers are saving a lot of money (Greaves
1996).
i. When interest rates are low, and consumers are deferring their
spending for the future, it signals to businesses to invest in future
projects. When the interest rates rise, this tells businesses not to
invest in future products because consumers are spending in the
present (Singh, 2014).
b. Austrians argue that in a truly free market economy, there would be no
need for government intervention to control the interest rates (Butler,
2010)
3. The Austrian Business Cycle Theory can accurately describe what led to the
housing market crash and in result, the Great Recession of 2007 (Wolfram, 2014).
a. When the Central Bank artificially lowers interest rates by loaning money
to commercial banks it actually hurts the economy

Ethan Ridings 2

i. When the banks have more money to loan out at lower interest
rates, it signals to producers that investing in future projects is a
good idea.
ii. In reality, consumers are spending more in the present.
b. The increase in the money supply may in the short run look robust, but the
future wont be able to support what had been created.
i. When the Federal Reserve dramatically lowered interest rates in
the early 2000s, it signaled consumers to buy more houses, because
of the ease of getting a low interest mortgage, and for producers to
build more houses. The government also mandated lenders to be
more lenient on their mortgage loans and to lend to less reliable
consumers.
ii. When inflation inevitably occurred, the Federal Reserve increased
interest rates and housing prices plummeted. Individuals had
higher mortgages than the value of their houses. People began
defaulting on their mortgages and had their homes foreclosed
upon. This dramatically decreased the capitol of the lending
institutions. All of this added up and ultimately caused the great
recession of 2007 (Wolfram, 2014).
Conclusion:
Some would argue that a lot of what the Austrian school has to say is just a form of
logical thinking. They dont use data and graphs as much to describe their views but
empirical evidence and the study of human interactions. The behavior of a naturally free
economy is a very hard thing to measure and the Austrian school uses interest rates to
help determine current economic conditions. From this we can see that their business
cycle theory accurately portrays the events that led to the recession of 2007.

Ethan Ridings 3

Works Cited
BLS. "Audio Script." U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics,
n.d. Web. Retrieved June 2015.
Boettke, P. (2008, January 1). Austrian School of Economics. Retrieved November 6,
2014.
Butler, E. (2010). Ludwig Von Mises. Retrieved November 6, 2014.
Greaves, B. (1996, January 1). Austrian Economics: An Anthology. Retrieved November
3, 2014, from
http://fee.org/files/doclib/20130703_AustrianEconomicsAnAnthology.pdf
Singh, M. (2014). The Austrian School Of Economics. Retrieved November 9, 2014.
Wolfram, G. [Hillsdale College Online Courses]. (2014). The Great Recession Explained
in 3 Minutes. [Video file]. Retrieved September 20, 2014.