AEN: You’ve never thought of providing a systematic critique of the Austrian business cycle theory, for instance?What does Kirzner mean by the statement: “I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912”?
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: 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.”
“An Interview with Israel M. Kirzner,” Austrian Economics Newsletter (vol. 17.1, 1997).
The answer is, I think, provided by Alan O. Ebenstein:
“in England during the early 1930s, it was Hayek, not Mises, who was the actor, and it was Hayek’s work that become known as Austrian business cycle theory. Even later, Mises did not adopt as his own Hayek’s theory that depressions and recessions are primarily caused by real changes in the structure of production. Mises wrote in Human Action (1949) of his own ‘monetary or circulation credit theory of the trade cycle’: ‘The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.’ Mises’s main point was that excessive monetary expansion leads to inflationary collapse, not Hayek’s thesis that excessive monetary expansion misshapes the structure of production. What were paragraphs in Mises’s thought became books in Hayek’s. It could be the case that Mises’s oral teaching was slightly different from his written work, and it is possible that in his lectures he may have given more emphasis, as Hayek did, to relative price relations that are disturbed by credit manipulation as well as to changes in the general price level. If so, there would be more congruity between Mises’s and Hayek’s business cycle theories.” (Ebenstein 2005: 52–53).There is thus the possibility that in Mises’s lectures and personal conversations his version of the trade cycle theory was developing and diverging from his published work, where his version of the ABCT remained different from Hayek’s. Hayek might seem to confirm this:
“One episode in the growth of my expositions may perhaps be worth recording here. In the draft of my account of American monetary policy after 1920 I had made use of what I thought was a theory of Ludwig von Mises that was familiar to us in the Vienna circle. But another member of our group with whom I was in daily contact, Gottfried Haberler, persuaded me after reading my first draft that no sufficient exposition of the theory I had used was to be found in Mises’s published work, and that if I was to expect to be understood, I must give a fuller account of the theory underlying my report of the events described. Thus arose the long footnote ... containing the first statement of my version of Mises’ theory.” (Hayek 1984: 2–3).In light of all this, one should be aware that Mises’s published versions of ABCT are not quite the same as Hayek’s, and do not emphasise the structure of production distortions imagined by Hayek.
Ebenstein, A. O. 2005. Hayek’s Journey: The Mind of Friedrich Hayek, Palgrave Macmillan, New York.
Hayek, Friedrich A. von, 1984, “Introduction,” in R. McCloughry (ed.), Money, Capital & Fluctuations: Early Essays, Routledge & Kegan Paul, London.
Mises, L. 1998. Human Action: A Treatise on Economics, Mises Institute, Auburn, Ala.