How Austrian economics explains business cycle and Economic crisis? In fed economy, the central bank lowers interest rates to stimulate the economy. This is very bad to economy. This causes entrepreneurs to mistakenly think there is a large amount of savings (Wrong Price signals). This increases entrepreneurial lending and makes it possible to move the production factors to be invested in the consumer goods industry into the capital goods industry. 

This increases foolish investment and bubbles that society can not afford. This increases the demand for the capital goods industry and raises the price of capital goods. Consumers are over-consuming because lower interest rates allow more money to be produced. As a result, demand for the consumer goods industry rises and consumer goods prices rise relatively. Since the government abolished the gold standard and made it possible to produce money at all times, the price of consumer goods is now absolutely high (Stagflation). 

The boom caused by such fictitious investment and overconsumtion is a bubble, so it can not last long. Government and Fed makes economic bubbles. It does not last long, the bubble bursts, and recession and Depression come. Entrepreneurs realize that they have made the wrong investment because of the wrong (Price) signal. They realize that there is too little savings to invest in capital goods differently from what they think. So they withdraw the production factors that invested in capital goods and move them back to the consumer goods. 

This results in many restructuring of labor and capital, resulting in massive damages, collapse of the banking system, and unemployment. This is a natural process of the market to liquidate government-led foolish investments. Therefore, the recession period is the same as the recovery period. Many governments, however, did not understand it and lowered interest rates and created bubbles again to solve the economic crisis. This repeated the cause of the economic crisis, thus creating periodic economic cycles.

This is a very simple explanation of the Austrian Business Cycle Theory (ABCT). This theory is effective in explaining the causes of today 's repeated economic crisis. If mainstream economists are correct, why is there still an economic crisis? The answer is to eliminate the government that reigns above the economy, and to abolish the central bank. And letting the money and interest rate go to the market, not the government.