I am not an Austrian, but...
Three decades ago (ouch!) I made a valiant effort to understand Austrian business cycle theory. I failed. I wanted to believe it, because I found the existing theories (Old Keynesian or New Classical) unsatisfactory. But I couldn't get it to make sense.
Despite that (and never mind who's to blame for my failing to make sense of it), I did get one useful insight out of reading that stuff. It's an image which has stuck in my mind ever since, and which I was reminded of a few weeks ago when I saw a photo of a construction site, where work had stopped on an unfinished building (I'm sorry, but I can't find the blog where I saw that photo). And I was reminded of it again when I read Stackelberg Follower's post on potential output. And again, during the CD Howe Monetary Policy Council meeting, when a participant (non-attribution rules) said that relative demand for different types of labour had changed.
Here's the Austrian metaphor (where did I read this?): an architect has blueprints for a new building, and a stack of bricks. For some reason (that's where they lost me) the blueprints get accidentally magnified. They start the construction, but run out of bricks halfway through. They can't get more bricks for some reason (they lost me again there) and so the building remains half-finished. During the boom, the investment seemed twice as big and twice as valuable than it should have been. When reality dawns in the credit crunch, the half-finished building is worthless. It's a parable of malinvestment. It only makes sense when you disaggregate investment.
Watch for signs of this parable. Sometimes they will be literal, when we see partly-finished construction projects on which work has stopped. Other times the signs will be less literal, when we see there has been too much investment in some capital goods and too little investment in other capital goods, so that the total value of all the capital goods, in terms of producing things that people want to buy, is lower than it would have been. And sometimes the malinvestment will be in human capital, not physical capital. Some people won't complete their training. Others will realise they have training in the wrong skills.
During the boom, the value of output and income appeared higher than it now appears to have been, because some investment was not as valuable as people thought it would be.
The validity of this Austrian insight does not mean we should follow the rest of the Austrian prescription, and just let the recession take its course. But neither should we ignore it.
We should recognise that it would be unwise to estimate potential output by extrapolating from past actual output. With hindsight, past actual output was less valuable than we thought it was at the time. (This was Stackelberg Follower's point, if I understand him correctly). More importantly in my view (since I am always leery of GDP, and even more leery of estimates of potential GDP), we need to recognise that the natural rate of unemployment will be temporarily higher than it once was as workers reallocate.
This does NOT mean that all increases in unemployment are due to an increased natural rate. Rapidly-falling inflation should convince us otherwise, as should widespread declines in employment across many sectors.
It does NOT mean we should not use monetary and/or fiscal policy to increase aggregate demand. It does mean we should recognise the limits on aggregate demand policy. It does mean we should also focus on improving labour mobility, both occupationally and geographically, using fiscal and/or other policies. (Geographic mobility will also be harmed by home-owners with negative equity being unable to switch houses, and that is an important area for public policy on which I really wish I had some good ideas, because I'm sure something useful could be done).
Pick and choose. We don't have to agree with everything someone says to be able to learn something useful.
(And Austrians: yes, I realise that the blueprints got magnified because interest rates were too low, but I couldn't make sense of the idea that monetary policy could set (real) interest rates too low in a world of perfectly flexible prices. So I just like to add some Austrian sauce to a New-Keynesian/monetarist/whatever meal.)