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Chapter 4: Hayek’s Pure Theory of Capital
In 1941, The Pure Theory of Capital was too late – and too obscure – to catch the attention of an economics profession that was fixated upon John Maynard Keynes. Although capital is central to issues of market coordination, capital theory held no broad interest, even prior to the developing era of Keynesian economics: In the Cambridge tradition that governed Keynes’s brief study of economics, the Mill-Jevons theory of capital, later developed by Bohm-Bawerk and Wicksell was not seriously considered. By about 1930, these ideas had been largely forgotten in the English-speaking world. (Hayek, 1983, p. 48) By Hayek’s own description, The Pure Theory of Capital is a ‘highly abstract study of a problem of pure economic theory’ that attempts to establish the ‘fundamentals’ that must serve ‘more concrete work on the processes which we observe in the real world’ (Hayek, 1941, p. v). In particular, Hayek wished to remedy earlier expositions of a monetary theory of business cycles (Hayek, 1933, 1935, 1939) and to respond to criticisms that arose primarily from ‘the inadequacy of its presentation of the theory of capital which it presupposed’ (Shackle, 1981, p. 242). The protracted and interwoven development of Hayek’s capital theory and business cycle theory was set against the background of an intense rivalry between Hayek and Keynes in the 1930s.
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