AUSTRIAN SCHOOL

An economic school of thought that originated in Vienna during the late 19th century with the works of Carl Menger. The Austrian school is set apart by its belief that the workings of the broad economy are the sum of smaller individual decisions and actions, unlike the Chicago school and other theories that look to surmise the future from historical abstracts, often using broad statistical aggregates.

Also known as the "Vienna school" and the "psychological school".

The Austrian school holds a special view of the modern business cycle; it contends that boom cycles are actually a misallocation of capital resources caused by interfering monetary policy. When central banks effectively expand the money supply by lowering interest rates, it creates an multiplying effect in the economy. This leads business owners to incorrectly assess the amount of available capital and the level of demand by consumers. Eventually, overinvestment by corporations leads to a "bust" cycle in which prior misallocations must be worked out.