A heroic theory of the business cycle: Incorporating Schumpeterian insights into Austrian business cycle theory

This paper re-examines the business cycle theory of Joseph Schumpeter and finds a number of similarities to the Austrian theory of the business cycle. The similarities are in methodology, the granularity of study, the effect of money expansion, and the mechanics of how boom goes to bust. The principal differences are causation and the economic significance of the cycles. Importantly, Schumpeter sees the business cycle as a constructive process, the inevitable and unavoidable result of entrepreneurial innovation and the mechanism for a rising standard of living. The Austrians, on the other hand, generally see it as the negative, avoidable consequence of monetary intervention by central banks or fractional reserve private banks. This paper identifies the significant similarities between the two theories, and then suggests that a synthesis of the two theories may offer a more powerful theoretical model to explain the ubiquity of business cycles in capitalist economies.