The Economics of Ignorance and Coordination

The Economics of Ignorance and Coordination

Subjectivism and the Austrian School of Economics

New Thinking in Political Economy series

Thierry Aimar

This book clarifies the specific nature of the Austrian theory and restores the unity and open-mindedness of the Austrian school in general. The intention is not to offer a collection of different or parallel ideas, but rather to retrace, from a pedagogical and constructive perspective, the various stages of the construction of a well-founded theoretical edifice: from Ludwig von Mises to Murray Rothbard, from Friedrich Hayek to Israel M. Kirzner and from Lachmann to Lavoie. The book is a reconstitution of the way Austrian ideas and concepts organize themselves in a common structure.

Chapter 8: Austrian Theory of the Business Cycle

Thierry Aimar

Subjects: economics and finance, austrian economics


___________________________________________________ The Austrian theory of the business cycle fits into a more general context of economic literature’s interest between the wars in questions of economic conjuncture which was accentuated by the 1929 crash. 1 From a different angle, the theory is linked to a traditional subject for the Austrians, the mode of integration of money to real phenomena. Although theirs is not the only work in the Austrian theory of the cycle, Mises and Hayek are its two main authors. 2 Mises initiated a theoretical representation of the channels of influence of money on the real economy in The Theory of Money and Credit (1912); it explains economic disturbances as the effects of money creation on the relative prices structure. He developed this analysis between the wars, 3 then in successive editions of Human Action (1949, 1963, 1966). Hayek’s first economic research was on trade cycle theory in the middle of the 1920s. 4 He especially developed his ideas during a cycle of four conferences at the London School of Economics, on Lionel Robbins’ invitation. They were immediately published under the title Prices and Production (1931). This is undoubtedly the most central of Hayek’s theories – and the most stylistic – on the subject. It unleashed a barrage of sometimes violent arguments from such illustrious figures as Keynes, Sraffa and Hicks but even today is the work of reference on Austrian cycle analysis. 5 Hayek returned to some of the ideas of Prices and Production to explain and refine them to a limited...

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