Similar Theories
For more details on this topic, see Austrian business cycle theory#Similar theories.Debt deflation is not the only economic theory that cites credit bubbles as a key factor in economic crises; the most noted other theory is Austrian business cycle theory, which posits that economic crises are caused by excess credit growth and the malinvestment (misallocation of resources) that results, with these being caused by central bank monetary policy and the fractional-reserve banking system.
The first difference between these may be stated as debt-deflation being a demand-side theory, which emphasizes the period after the peak – the end of a credit bubble and contraction of debt causing a fall in aggregate demand – while the Austrian theory is a supply-side theory, which emphasizes the period before the peak – the growth of debt during the growth phase causing malinvestment. The theories may thus be seen as complementary, addressing different aspects of the issue, and are so-considered by some economists.
In normative respects the theories are sharply different, with proponents of debt deflation generally arguing in the Keynesian, more precisely Post-Keynesian, tradition that government action can be beneficial, notably via debt forgiveness or engineering inflation (to reduce debt burden), or facilitating change in industries and investments, while Austrian economists generally argue that there is nothing to be done, the "malinvestments" needing to be "worked out of the system".
There have been other theories of economic crisis citing credit, discussed at the relevant section of Austrian business cycle theory.
Read more about this topic: Debt Deflation
Famous quotes containing the words similar and/or theories:
“Take us generally as a people, we are neither lazy nor idle; and considering how little we have to excite or stimulate us, I am almost astonished that there are so many industrious and ambitious ones to be found; although I acknowledge, with extreme sorrow, that there are some who never were and never will be serviceable to society. And have you not a similar class among yourselves?”
—Maria Stewart (1803–1879)
“It takes twenty or so years before a mother can know with any certainty how effective her theories have been—and even then there are surprises. The daily newspapers raise the most frightening questions of all for a mother of sons: Could my once sweet babes ever become violent men? Are my sons really who I think they are?”
—Mary Kay Blakely (20th century)