The Role of Ideal Types in Austrian Business Cycle Theory

The source of disagreement and criticism of the Austrian Business Cycle Theory comes from an ambiguity about the theory, caused by both supporters and critics. They both fail to recognize that the theory is constructed using a vareity of ideal types. Hence, the amount of illumination that the Austrian Business Cycle Theory can cast upon any particular historical happening varies directly with how nearly the specific circumstances of the time in question approach the idealized state of affairs assumed in constructing the various ideal types it incorporates. With this explanation, it then becomes clear that the Austrian Business Cycle Theory is not the only possible explanation of macroeconomic downturn but provides a possible account of specific historical episodes.

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