Subjectivism and the Austrian School of Economics
New Thinking in Political Economy series
Chapter 8: Austrian Theory of the Business Cycle
___________________________________________________ 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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