Thursday, June 23, 2011

The Differences Between Mises and Hayek on ABCT

In “An Interview with Israel M. Kirzner,” Austrian Economics Newsletter (vol. 17.1, 1997), Kirzner has this to say about Austrian business cycle theory (ABCT):
AEN: You’ve never thought of providing a systematic critique of the Austrian business cycle theory, for instance?

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).
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”?

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.


  1. One of the reasons why Mises is still a much superior economist than Hayek.

  2. And yet his version of ABCT is still wrong.
    There is the explicit use of the invalid Wicksellian natural rate interest concept in the early versions. The same assumption that the economy is at full employment. The same inability to explain what happens when real resources and labour are in fact available when fiduciary media/fiat money expand the money supply. The same neglect of international trade.

    1. the main component of the interest rate (risk and such premiums aside) is simply the intersection of supply and demand in the market for loanable funds... the supply and demand for those funds are determined by the varied time-preferences of "producers and consumers" (people) in the market... which would make one think that interest rates are not arbitrary and are actually an example of spontaneous order...

      btw are you a post-keynesian, new-keynesian, neo-keynesian...?

    2. Perhaps you should look at the subtitle of the blog?

  3. True. But I wouldn't say it's wrong, I'd rather say it's incomplete.

    On the "full employment" issue, what do you think of the following quotation from Mises?

    "On the eve of the credit expansion all those production processes were in operation which, under the given state of the market data, were deemed profitable. The system was moving toward a state in which all those eager to earn wages would be employed and all nonconvertible factors of production would be employed to the extent that the demand of the consumers and the available supply of nonspecific material factors and of labor would permit. A further expansion of production is possible only if the amount of capital goods is increased by additional saving, i.e., by surpluses produced and not consumed. The characteristic mark of the credit-expansion boom is that such additional capital goods have not been made available. The capital goods required for the expansion of business activities must be withdrawn from other lines of production."

    There he seems to say that the boom generated by the new issue of fiduciary media is unsound when the market is near to its maximum utilization of resources. Past that, the only way of keeping the boom running is by additional savings.

  4. "There he seems to say that the boom generated by the new issue of fiduciary media is unsound when the market is near to its maximum utilization of resources. "

    Yes, he is: but it is in periods of recession/depression that interests rates tend to be lowered by fiduciary media/fiat money. So why aren't real resources available at that time?

    "Past that, the only way of keeping the boom running is by additional savings. "

    What about international trade? Is this a world where no one trades across borders?

    Anyway, Keynesian policy already deals with inflationary booms: you cut government spending, balance the budget, possibly run a budget surplus if necessary and raise taxes, and raise interest rates. The boom is moderated, real resources are freed up for a new cycle of real GDP growth.

    Honestly, what does Mises think happened in the era of classic Keynesianism (1945-1979)?

    There was utterly unprecedented economic growth, productivity growth, real output growth, and real wage growth in line with productivity in these years: it called the Golden Age of Capitalism, and it was the era of Keynesianism.

    Keynesianism smoothed out the variability of business cycles, keeping inflation low until the years before the breakup of Bretton Woods.

    Stagflation was caused by
    (1) the effects of the US dismantling its commodity buffer stocks in the 1960s, which had previously keep commodity prices stable. That led to supply price shocks in 1969-1972

    (2) the uncertainty caused by the breakup of Bretton woods, feeding into futher speculation in commodities

    (3) wage-price spirals, caused by factor input costs rising in industrialized nations

    (4) the disaster of the first and second oil shocks.

    The solution for stagflation is given by
    Nicholas Kaldor in “Inflation and Recession in the World Economy” (Economic Journal 86 (December, 1976): 703–714).

    The solution is (1) incomes policy and (2) commodity buffer stocks to break the source of the problem by maintaining stable commodity prices. This is exactly why the 1940s, 1950s, 1960s had stable commodity prices: the US maintained buffer stocks, then dismantled them in the mid-1960s.