Is Haberler’s theory of the business cycle still relevant today?

22 Dec

Gottfried Haberler

‘Money and the Business Cycle’

Haberler believed over-ambitious expansion funded by easy credit would not create sustainable growth, as after the initial expansionist drive the factors of labour would return to the less complex strands lower down in the production chain and demand for, as well as volume of, the products which are more costly and complex to produce would slacken.

During the time taken to construct these new-fangled production processes, the labour employed in so doing would spend more on traditional consumer goods, thus stimulating demand for these and eventually causing a shift in production and in the factors of labour back towards manufacture of these less complex products.

Haberler strongly critiqued solely monetary theories of the boom and bust cycle, seeing inflation and deflation in the first incidence as being responses to the volume of production and demand. His was primarily a structural explanation, which conceded that once a recession had set in and investor confidence was set back, the value of capital would fall in isolation to the assets it was tied to as no one wanted to be left holding risky debts.

These days in our highly developed economies, we might argue that this is a deterministic view, and demand for ever more sophisticated gimmicks and technology is such that the market for innovative and complex products is unlikely to dry up simply because they used leverage to kick-start their idea. But it could prove instructive in trying to explain the lack of uptake for things like ‘smart’ homes and gadgets.

The Internet of Things was lauded as the next ‘big idea,’ but it was not certain it was meeting a clearly demonstrated consumer need, and security oversights by ‘smart’ gadget manufacturers have made some question the point of linking things like burglar alarms and cars to a worldwide web where any user can potentially hack into them.

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