The Capital Asset Pricing Model as Modern Austrian Macroeconomics : Theory and Policy

According to Austrian macroeconomic theory, capital accumulation today generates supply tomorrow. Will that supply match tomorrow's demand? In this paper we study this question in a multi-good and risky environment with an efficient financial system. Towards this end we develop a model based on the Capital Asset Pricing Model (CAPM), Rational Expectations,, and Linear Homogeneous Production Functions. Within this framework we show how the financial system in the form of CAPM allocates capital resources across the different sectors in the economy so as to maximize the ratio of expected return to a measure of risk like the standard deviation of returns.for some initial time period t=0. In t=1 a linear homogeneous production function subject to a random productivity/finance shock determines actual output and the structure of production. The link between t=0 and t=1 is rational expectations, the assumption that the subjective probability distribution in t=0 on which real investment decisions are made is equivalent to the objective distribution generating the actual returns to capital and via constant factor shares total output in t=1. If actual output is more (or less) than expected output in t=0, we have a cyclical expansion (or recession) the magnitude of which depends on the spread of the distribution in t=0. With this model we discuss monetary policy under a banking system with Central Bank digital accounts for all; 2) an all inclusive transaction tax to substitute for the present tax system in the U.S.; and 3) the tradeoff between economic growth and economic volatility