A.B.C.T. not as easy as 123: Investigating the Legitimacy of the Austrian Business Cycle Theory

In the last Macroeconomics lecture that I attended, Professor Stevenson (a great guy), tried to provide us with a perspective on the many theories of why the economic business cycle, or the boom-bust cycle, occurs. He discussed Keynes' "animal spirits" explanation, the classical 'change in factors of production' explanation, the political business cycle explanation, and finally the idea that its the fault of banks' ability to extend credit. The last one came awfully close to the reasoning behind the Austrian Theory of the Business Cycle, but of course I have not heard any of the words Austrian, Mises, or Hayek in this class all semester.

That lecture made me wonder if I fully understood the ATBC, so shortly afterward I looked it up on Wikipedia. Once again, it did not fail me, and the article there did make me realize that I owe their explanation of things a more through investigation.



The extent of my previous understanding was the following: When the fed increases the money supply, it devalues the money that we all held before the increase. But we do not realize this at first, we only realize that there is suddenly more money and credit available. For that reason, interest rates go down below equilibrium level and so businesses and consumers are able to get cheap loans and spend the new money before prices rise throughout the economy. Firstly, this is an unfair redistribution of wealth, and secondly it leads to malinvestment through excessive incentive to take out a loan and make risky investments or purchases that you can't necessarily cover when/if they go south. Basically, increasing the money supply = stealing value from savers + unfair redistribution + malinvestment = bad.

However, as Wikipedia tells me,

The Austrian explanation of the business cycle varies significantly from the mainstream understanding of business cycles, and is generally rejected by mainstream economists. Economists such as Milton Friedman,^[6][7] Gordon Tullock,^[8] Bryan Caplan,^[9] and Paul Krugman^[10] have said that they regard the theory as incorrect.

So next I started reading the articles that those four economists have written explaining why the ATBC is wrong. Unfortunately the Milton Friedman source is unavailable online, but the other three are...