The Review of Austrian Economics, 14:4, 331–351, 2001.
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Empirical Evidence on the Austrian Business
JAMES P. KEELER email@example.com
Department of Economics, Kenyon College, Gambier, OH, 43022, USA
Abstract. The Austrian business cycle theory suggests that a monetary shock disturbs relative prices, such as the
term structure of interest rates, systematically altering proﬁt rates across economic sectors. Resource use responds
to those changes, generating a cyclical pattern of real income. The divergence of the interest rate structure, from
the previous and unchanged time preferences, means that the expansion is unsustainable and must end in recession.
Quarterly data for eight U.S. business cycles, 1950:1 through 1991:1 are standardized by time period and used to
explore business cycle facts and relations between money, interest rates, capacity utilization and income. Results
are consistent with the hypotheses of the Austrian theory of a business cycle caused by a monetary shock and
propagated by relative price changes.
JEL classiﬁcation: E3.
The Austrian theory of the business cycle, as originally presented by Mises (1966, 1971)
and Hayek (1967), implies several distinctive hypotheses about patterns of relative prices,
the response of the income level and its composition, and the role of resource constraints.
Business cycle theories demonstrate their power of explanation by hypothesis testing or
by simulation in comparison to actual cycles. Since Burns and Mitchell (1946), “stylized
facts” of cycles have become the behavior that needs to be explained. Austrian theory
offers distinctive stylized facts about the cyclical behavior of real interest rates, changes
in composition of capital structure, the relation of short-term to long-term interest rates,
and the endogenous nature of expansion and contraction phases. Garrison (1986:449–450),
Tullock (1988:74–76), and others have considered the empirical question of the explanatory
power of the Austrian theory and whether the mechanism of price induced changes in the
composition of the capital stock is sufﬁcient in magnitude to account for the macroeconomic
phenomenon of a business cycle. There is a clear need to consider how well the Austrian
theory can explain observed cyclical behavior.
There have been few empirical analyses of the Austrian theory, due to limited ability to
express Austrian concepts in operational terms and to methodological opposition to empiri-
cal testing of hypotheses. Mises (1966:56) claimed that “the impracticality of measurement
is not due to the lack of technical methods for the establishment of measure. It is due to
the absence of constant relations.... Statistical ﬁgures referring to economic events are his-
torical data. They tell us what happened in a non-repeatable historical case.” Within this
methodology, empirical behavior could conﬁrm or illustrate theory or characterize historical
episodes, but would not be considered evidence in the evaluation of theory. The concepts
of subjective economic behavior present widely recognized problems for measurement and