[Throughout today, residents of Greece - mired in a recession dating back to the Olympic boom in 2004 - will vote a second time in as many months. One of the central issues being debated is whether or not Greece should exit the Euro, a government managed monetary exchange mechanism. Below is a recent interview with economist Mark Thornton, who among other things, has written extensively on the boom-bust cycle and central planning.]
Tim: What originally drew you to the Austrian school of economics?
Mark: It was the Austrian Theory of the Business Cycle.
Tim: What is the Austrian Theory of the Business Cycle?
Mark: The ABC Theory is a specific version of Richard Cantillon’s analysis of changes in the supply of money in an economy. In the modern era central banks control the money supply and make changes in the money supply in order to influence interest rates. When they influence interest rates away from what the market would dictate, they undermine the decisions of entrepreneurs and investors in a systematic, economy wide fashion. For example, lower than market rates encourage more investment in longer term, more “roundabout” capital. In fact we refer to these distortions as “Cantillon Effects.” It also encourages more consumption and less savings. This “stimulates” the economy, but in the long run it is obviously a recipe for disaster. [Keep reading…]
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