AEN: You’ve never thought of providing a systematic critique of the Austrian business cycle theory, for instance?A number of points emerge from this:
KIRZNER: No, I’ve never had too much interest in the Austrian business cycle theory. I’ve never felt that the Hayekian business cycle theory was essentially Austrian. In fact, Mises, who was the originator of this whole idea in 1912, didn’t see it as particularly Austrian either. There are passages where he notes that people call it the Austrian theory, but he says it’s not really Austrian. It goes back to the Currency School and Knut Wicksell. It’s certainly not historically Austrian. Further, I would claim that, as developed by Hayek, there are many aspects of it that are non-Austrian. I don’t believe that to be an Austrian you have to buy into the Hayekian view of business cycles.
AEN: Are there any aspects of Hayek’s business cycle theory that you regard as Austrian?
KIRZNER: I recently wrote a paper to accompany the facsimile German edition of Prices and Production. I identified what seemed to me to be elements of Hayek’s later work on coordination, miscoordination, and knowledge. I argued that the germs of his later ideas can be traced to this volume, especially his description of the upswing stage of the cycle. This is a phase during which some decisions are out of sync with other decisions. Current investors are making decisions which anticipate the decisions of others down the road, which are in fact not there. Leaving the exact mechanism aside, that is the kind of thing Hayek taught us to look for in analyzing the market process. In that respect, it's Austrian.
AEN: And the rest of the theory?
KIRZNER: Otherwise, the Austrian theory of the business cycle is a macro theory. It’s an equilibrium theory. And it treats capital in an objective sense rather than a subjective sense. It treats time as somehow embedded in the capital goods themselves. So I’ve always had a certain reserve about that particular theory, however brilliant it may be. I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912.
AEN: Do you accept the idea that interest-rate manipulation by the central bank can cause distortions in the structure of production?
KIRZNER: Certainly the Austrian cycle theory showed brilliantly how this can happen. But it’s one thing to develop a theory which could explain a downturn. It’s quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.
Mises used to poke fun at those who criticize the Austrian theory of the business cycle as being too simple. He said that still doesn’t tell what’s wrong with it. That’s correct, as far as it goes. Perhaps many market aberrations are of this kind. But that can only be a question of historical understanding. We must be able to look at every case to see just what is happening.
(1) Kirzner never felt “that the Hayekian business cycle theory was essentially Austrian.”You have to wonder, then, what Kirzner would think of modern Austrians desperately trying to use ABCT to explain every recession that has ever happened. And, moreover, for the moderate subjectivist Austrians who agree with Kirzner, a question occurs: what recessions in their mind aren’t explained by ABCT?
(2) Hayek’s version of ABCT contains “aspects” that are “non-Austrian.”
(3) Austrians do not even need to adhere to ABCT, as it is not some fundamental idea of Austrian economics.
(4) Hayek’s development of ABCT was not “quite consistent with the way Mises laid it out in 1912.”
(5) Kirzner did not even think that all recessions could be explained by ABCT.
The commentator Iain below alerts me to another issue. Kirzner argues that “the Austrian theory of the business cycle is a macro theory. It’s an equilibrium theory.”
How strange it is, then, to see Austrians denying the validity of macroeconomics or macro concepts, particularly when Roger Garrison, one of the leading neo-Austrian moderate subjectivists in the tradition of Hayek, has devoted himself to creating an Austrian macroeconomics (Garrison 1984 and 2002). Furthermore, Steve Horwitz notes how Hayek’s work in the 1930s was essentially in macroeconomic theory and what its legacy was:
“Hayek’s ‘pre-Keynesian’ macroeconomics was not left to die on the vine. Although not much discussed in self-consciously Austrian books, there is an Austrian macroeconomics that is alive and well. There are three distinct issues that Austrian macroeconomists have been pursuing in the post-revival years. First are the extensions of the Mises–Hayek theory of the trade cycle ... . Second is the recent interest in the idea of ‘free banking’ .... Third, and arguably even less explicitly Austrian, is the work of Leland Yeager, Axel Leijonhufvud, and Robert Greenfield that has tried to revive interest in the pre-Keynesian monetary disequilibrium theorists...” (Horwitz 2000: 2).J. E. King gives a further explanation of ABCT and macroeconomic and equilibrium theory:
“In the 1930s, however, Hayek had formulated an influential theory of the trade cycle, which he explained as the result of mistaken government policy. Excessive monetary expansion in the upswing pushed the rate of interest below its ‘natural’ value, encouraging a short-lived boom in investment that extended the average degree of ‘roundaboutness’ of production beyond its sustainable level. In the ensuing depression the appropriate capital structure was restored by means of a decline in the level of investment expenditure. Hayek interpreted the reduction in output and employment in the downswing as the unavoidable consequence of the initial policy error (Hayek 1931). His analysis of money and capital was heavily criticized at the time [Sraffa, 1932; Kaldor 1937]. It not only proved to be vulnerable to the Cambridge capital critique ..., but also appeared to rely upon concepts of equilibrium (the ‘natural rate of interest’, for example) that were inconsistent with the broader principles of Austrian economic theory” (King 2002: 229–230).It appears that Kirzner in the comments above is pointing to precisely this issue.
Garrison, R. W. 1984. “Time and Money: The Universals of Macroeconomic Theorizing,” Journal of Macroeconomics 6: 197-213.
Garrison, R. W. 2002. Time and Money: The Macroeconomics of Capital Structure, Routledge, London.
Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.
Horwitz, S. 2000. Microfoundations and Macroeconomics: An Austrian Perspective, Routledge, London and New York.
Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.
King, J. E. 2002. A History of Post Keynesian Economics since 1936, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.