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Eureka Moment Proves Austrian Theory of the Business Cycle

As many of my readers know, I teach a course in the spring called “Financial Economics” at Chapman University, where I am a Presidential Fellow.

Financial Economics is about the contributions and insights of economists in the field of finance and investing. Over the years, there have been many breakthroughs, such as those from University of Chicago economists Eugene Fama, who championed the efficient market theory and the development of index funds, and Richard Thaler, who advanced the study of “behavioral finance.”

Two of the textbooks used by my class are “A Random Walk Down Wall Street,” by Princeton University Professor Burt Malkiel, and “Stocks for the Long Run,” by the University of Pennsylvania’s Jeremy Siegel, who is known as the Wizard of Wharton.

The course also includes the contributions of the great Austrian economists, such as Ludwig von Mises and Friedrich Hayek. Students are required to read my book, “A Viennese Waltz Down Wall Street: Austrian Economics for Investors,” in which I argue that the stock market is more like a dance than a random walk.

Last Monday, I had an eureka moment in my class. I was explaining the Austrian theory of the business cycle to them using my 4-stage model of the economy (a form of Hayek’s triangles). I pointed out that the theory suggests that revenues, profits, employment and even stock prices for certain industries tend to be more volatile the further they are removed from final use (retail).

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