Austrian Model

throughout this course, we're focused mainly on the Keynesian model of economics. Let's check out another model real quick, the Austrian model. So the Austrian model of economics was an early model. It was an early model that was developed uh that supported a free market system, similar to the classical model. And it's supported a free market system over government planning the government planning everything about the economy. Okay, so this was developed by some Austrian economist, Carl Menger, and Frederic von Hayek, over the period of a few decades from 18 90 to 1930. So, notice this was before the Great Depression of the 19 of the 19 thirties. Right? So in the 1930s von Hayek developed the theory of the business cycle. And remember the business cycle, this is where we have uh expansions and recessions, right? Expansions and recessions in the economy. So, the economy goes through an expansion, it reaches a peak and then it recedes a little bit through a recession it hits the bottom and it expands again. Right? So he believed that when central banks lower their interest rates, firms increase their investment, right? And we've studied stuff like that, right? When the interest rates are lower, that makes it easier to take out loans to make investments happen. Right? So the investment increases and it leads to increased production. Okay, so lower interest rates lead to increased production. This economic expansion that comes from the increased production is unstable. So it's unsustainable for a long period of time because it's just funded by these low interest rates. And finally, it's going to lead to a recession after a while, it leads to a recession. And then the lower that the interest rates go, the deeper the recession is. That's the theory that von Hayek developed regarding the business cycles here. Okay, so the business cycle, basically, the lower the interest rate goes, the more the expansion increases and the deeper the recession is when it finally hits. However, in 1936, Keynes produced his theory of economics, which became widely adopted the Keynesian model, what we've studied throughout this course, and it drove interest away from the Austrian model. However, the Great Recession, the one that happened in 2007-2009, it actually fit the Austrian model pretty well. So, think about what we just talked about with the interest rates and how it affects uh investment and leads to recessions. So in 2001, there was a smaller recession that and the Fed lowered interest rates. So, remember how our Austrian model started with lower interest rates that led to increased firm investment. Okay, now, instead of building factories, a lot of this increased investment was in new housing. Okay, so a lot of the spending was in new housing, with these low interest rates, new houses were built, and the housing market, the real estate market searched, okay, the excessive investment in housing ended with a bubble, and then we ended up in the great recession. So we had very low interest rates that led to huge investments in the housing market. Eventually the housing market crashed, and we went into a deep recession because of the low interest rates that the Fed had uh established. Ok, so that's the idea of the Austrian model is basically focused on this business cycle and how low interest rates affect the business cycle um and lead to recessions. Okay, so that's about it with the Austrian model, let's go ahead and pause and move on to the next video.