Say’s Law and the Austrian Theory of the Business Cycle

Economists have tried to explain business cycles as well as fluctuations in the economy, but over the past two centuries, the explanations have fallen into two areas. The first area tries to explain business cycles as being the result of fluctuating aggregate demand; if overall demand for goods is strong (or to put it another way, consumers are confidently buying goods), then the economy is in a boom. However, if consumers choose not to spend, then the economy is in recession. The second area, as outlined by Sowell is that of seeing an economy as operating within internal proportions that are brought into imbalances. Say’s Law is found in this second category, and the Austrian theory of the business cycle (ATBC) also is a proportionality-based theory. However, most economists have failed to make the connection between Say’s Law and the ATBC.