Originally conceived by Ludwig von Mises (1953) early last century and developed most notably by F. A. Hayek (1967) before and during the Great Depression, the Austrian theory of the business cycle is a theory of the unsustainable boom. Its logic is firmly anchored in the notion that the price system is a communications network. A miscommunication in the form of an interest rate held below its market, or “natural,” level by central-bank policy sets the economy off on a growth path that is inherently unsustainable. Given actual consumer preferences and resource availabilities, such a policy-induced boom contains the seeds of its own undoing. The temporal pattern of resource allocation is inconsistent with the preferred pattern of consumption. In time this inconsistency precipitates a bust.

The uniqueness of the Austrian theory lies in the extra-market origins of the boom (central-bank policy) and in the self-reversing market process that turns boom into bust. Complications in the form of a possible spiraling downward of the economy into deep depression are only tangential to the Austrian theory. Similarly, the duration of the depression phase of the cycle, especially in the case of the Great Depression, depends upon many considerations (including the perversities of depression-born regulations on trade, industry and labor) that are not integral to the Austrian theory of the unsustainable boom.