Hayek on the Business Cycle

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to Prices
and Production and Other Works
by F.A. Hayek.

A. Hayek was barely out of his twenties in 1929 when he published
the German versions of the first two works in this collection, Monetary
Theory and the Trade Cycle
and "The Paradox of Saving."
The latter article was a long essay that was to become the core
of his celebrated book and the third work in this volume, Prices
and Production, the publication of which two years later made him
a world-renowned economist by the age of thirty-two. But the young
Hayek did not pause to savor his success. He was already hard at
work on "Reflections on the Pure Theory of Money of Mr. J.M.
Keynes," a lengthy critical review of John Maynard Keynes’s
two-volume Treatise
on Money
, which had been published in 1930. Hayek’s two-part
review appeared in late 1931 and 1932. There followed within a few
years the other three works collected in this volume. "The
Mythology of Capital" appeared in 1936 and was a response to
Frank Knight’s hostile criticisms of the Austrian theory of capital.
A short article on "Investment That Raises the Demand for Capital"
and the monograph Monetary Nationalism and International Stability
were published in 1937.

These seven
works taken together represent the first integration and systematic
elaboration of the Austrian theories of money, capital, business
cycles, and comparative monetary institutions, which constitute
the essential core of Austrian macroeconomics. Indeed these works
have profoundly influenced postwar expositions of Austrian or "capital-based"
macroeconomics down to the present day. The creation of such an
oeuvre would be a formidable intellectual feat over an entire lifetime;
it is an absolute marvel when we consider that Hayek had completed
it in the span of eight years (1929–1937) and still well shy
of his fortieth birthday.

amazingly precocious intellect and creative genius are on full display
in these works. Thus, before the age of thirty, Hayek already had
fully mastered and begun to synthesize and build upon the major
contributions of his predecessors in the Austrian tradition. These
included, in particular: Eugen von Böhm-Bawerk’s theory of
capital and interest; Knut Wicksell’s further elaborations on Böhm-Bawerk’s
capital theory and his own insights into the "cumulative process"
of changes in money, interest rates and prices; Ludwig von Mises’s
groundbreaking theories of money and business cycles; and the general
analytical approach of the broad Austrian school from Menger onward
that focused on both the subjective basis and the dynamic interdependence
of all economic phenomena.

There is something
else about Hayek that becomes apparent when reading his contributions
in this volume. The young Hayek was a great economic controversialist,
perhaps the greatest of the twentieth century. His entire macroeconomic
system was forged within the crucible of the great theoretical controversies
of the era. His opponents were some of the great (and not so great)
figures in interwar economics: Keynes, W.T. Foster and W. Catchings,
Ralph Hawtrey, Irving Fisher, Frank Knight, Joseph Schumpeter, Gustav
Cassel, Alvin Hansen, A.C. Pigou, Arthur Spiethoff to name a few.
Hayek took on all comers without fear or favor and inevitably emerged
victorious. As Alan Ebenstein notes, "Hayek came to be seen
in Cambridge, as Robbins and LSE’s point man in intellectual combat
with Cambridge."

the rest of the article

9, 2008

Salerno [send him mail]
is a senior fellow at the Ludwig
von Mises Institute
, professor of economics at Pace University,
and editor of the Quarterly
Journal of Austrian Economics

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