Public Choice School’s Response to Austrian Business Cycle Theory: ABCT versus PBCT

Abstract

Since Mises’ advocacy and Hayek’s refinement, ABCT(Austrian Business Cycle Theory) has been well formulated and showed valid explanation on actual economic business cycles as well. This article reveals how Public Choice responded to ABCT and how they developed its own ideas on business cycle. Gordon Tullock criticized Rothbardian sense of ABCT, followed by severe response from Sallerno. Some essential points on this argument were extracted to compare the basic difference of Tullock and Rothbard. ABCT activates business cycle when gov’t(central bank) ‘artificially’ lower the interest rate. Public Choice theorists focus on ‘why’ they do that. For ABCT, whether or not they have good intention is not important. PBCT, however, more emphasize that was done for the selfish political interests that politicians or bureaucrats have in political context. Austrians suggested new meaning to ‘bust’ phase of economic cycle, which under neo-classcical economics school long have been ignored as ‘bad’ event. ABCT assumes two key concepts; heterogeneity of capital, and mal-investment. PBCT is unfamiliar to those. So PBCT frequently does not identify the difference between over-investment and mal-investment, and assumes homogeneity of capital. It’s because Public Choice stands on neo-classical economics, not Austrian sense of economics. Then, four political business cycle theory(PBCT) models were reviewed: Opportunistic, Partisan, Rational Opportunistic, and Rational Partisan model. Austrians focusing on market process met Public Choice Theorists focusing political market met on the theme of business cycle. ABCT shows how ‘visible hand’ gives impact on market economy, and PBCT shows what impact business cycle has to political market. Each mutually gives sound tension, plus contributes to complementary explanation on overall business cycle.