> Austrian religion (it's not a "school"), as usual does not make predictions. It doesn't use models so it can't do that.
Austrian approach does not view economics as science, rather as a deductive study. So it cannot make predictions. This is why it clashes with mainstream economics, which attempts to be a science. I will leave open the question whether economics can or cannot be a science, rather I'll point out that I often see ideological assumptions (in particular the belief in central planning) bundled into what purports to be science.
> According to mainstream economy, deflation happens because consumers DO NOT HAVE MONEY to spend. So the producers have to cut prices to sell at least _something_. This in turn leads to wage decreases and layoffs. And this in turn leads to consumers having less money. Rinse, wash, repeat.
You probably wanted to say "recessions happen because customers do not have money". Deflations (in the sense of falling price levels) occur in other situations too (for example increases in productivity that outpace the increase in the money supply) and don't necessarily have the effects associated with recession.
The Austrian approach (see http://wiki.mises.org/wiki/Aus... ) to the business cycle is based on three issues: cluster of entrepreneurial errors, capital goods prices fluctuating more than those of consumer goods, and why the cycle tends to happen around changes in the money supply.
Let's take your argument, the customers losing money. Why are there whole sectors of economy that are unable to foresee this? If they foresaw it, they would have adjusted their production structure to the falling price level. But it comes unexpected to whole sectors rather than merely individual businesses. Your proposition does not explain why. The Austrians argue that this is due to faulty price signals caused by the changes in the money supply.
> Reality is often a little bit messier - wages rarely fall in nominal values, they tend to stick at zero growth. So nominal deflation doesn't appear, instead no-flation (1% inflation) happens. See: "European Union", "Japan".
This does not explain, among other things, why:
1. There are situations where a falling price level does not cause a recession (say in the consumer electronics sector, or the examples from the Atkeson/Kehoe paper I linked)?
2. Whole sectors cannot foresee this and adjust in advance?