The Austrian School originated in 1871; it is often mistaken for an institute when in fact it is an economic theory. It advocates liberal, non-interventionist economic policies and concludes that the market produces and distributes resources more efficiently than the state. Its foundation is individualism; it rejects the mathematization of economics and empiricism, opting instead to draw conclusions from self-evident axioms or irrefutable facts. It also rejects the distinction between macroeconomics and microeconomics, as it holds that the latter should explain the former.
One of the most important contributions of this theory is its explanation of the economic cycle. According to this theory, cycles begin with an artificial expansion of credit not backed by prior savings; this is what happens when central banks lower interest rates or print money. Low interest rates lead to excess investment in activities that would not have been viable at normal interest rate levels. This generates a false economic boom—a bubble—which bursts when cheap credit is cut off. The resources allocated to the bubble must be reallocated to truly productive projects, but since capital goods are heterogeneous, they cannot be easily reallocated from one sector to another; the adjustment would generate losses in value and, consequently, a depression.