Thursday, December 13, 2012

Critics of the Classic Hayekian Business Cycle Theory

Daniel Kuehn raises the question of who the major critics of the Hayekian business cycle theory were (or are).

My list:
(1) Piero Sraffa:
He was really the first and possibly the most important in these articles:
Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932. “A Rejoinder,” Economic Journal 42 (June): 249–251.
See also:
Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics. Cambridge University Press, Cambridge. 257-302.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242.
(2) Karl Gunnar Myrdal:
Myrdal, G. 1933. “Der Gleichgewichtsbegriff als Instrument der geld-theoretischen Analyse,” in F. A. Hayek (ed.), Beitrage zur Geldtheorie, Vienna. 361–487.
(3) Paul Rosenstein-Rodan:
However, I don’t think his criticisms were ever published (I could be wrong), but were certainly conveyed to Ludwig Lachmann in conversations in the 1930s as reported in this Austrian Economics Newsletter (AEN) (an interview with Lachmann):
AEN: You have talked a number of times about the importance of expectations in business cycle theory. What first drew your interest to expectations as far as the business cycle question was concerned.

Lachmann: Talking to Paul Rosenstein-Rodan, who was then a lecturer at University College, London – not technically in the London School of Economics – but he gave a course on the history of economic thought to which all of us who were research students then went.
It was Rosenstein-Rodan who in discussing Austrian trade cycle theory with me said, ‘Ah yes, but whatever happens in the business cycle is in the first place determined by expectations.’ And then he told me of the work that had been done in Sweden.”
Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978),
Rosenstein-Rodan was possibly referring to Gunnar Myrdal’s work listed in (2) above.

(4) John Maynard Keynes:
Keynes’s criticisms were in a response to Hayek’s review of his earlier work, and mostly in his private correspondence with Hayek:
Keynes, J. M. 1931. “The Pure Theory of Money. A Reply to Dr. Hayek,” Economica 34 (November): 387–397.

Ingrao, B. 2005. “When the Abyss Yawns and After. The Correspondence between Keynes and Hayek,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 236-256.

Ingrao, B. and F. Ranchetti. 2005. “Hayek and Cambridge: Dialogue and Contention,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 392-413.

Moggridge, D. (ed.). 1973. The Collected Writings of John Maynard Keynes (vol. 13). Macmillan for the Royal Economic Society, London.
It was in Keynes (1931) that he delivered his rather harsh verdict on Prices and Production:
“The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45 … It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.” (Keynes 1931: 394).
(5) Ludwig M. Lachmann:
Lachmann, L. M. 1943. “The Role of Expectations in Economics as a Social Science,” Economica n.s. 10.37: 12–23.
(6) Frank H. Knight:
Knight, Frank H. 1935. “Professor Hayek and the Theory of Investment,” Economic Journal 45.177 (March): 77-94.
Here is one of Hayek’s responses to Knight:
Hayek, F. A. von. 1936. “The Mythology of Capital,” Quarterly Journal of Economics 50.2: 199-228.
See also:
Boettke, P. and K. Vaughn. 2002. “Knight and the Austrians on Capital and the Problem of Socialism,” History of Political Economy 34: 155–176.

Cohen, A. J. 2003. “Hayek/Knight Capital Controversy: The Irrelevance of Roundaboutness, or Purging Processes in Time?,” History of Political Economy 35.3: 469-490.
(7) Nicholas Kaldor:
Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.

Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.

Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.
(8) George L. S. Shackle:
Shackle, George L. S. 1981. “F. A. Hayek, 1899– ,” in D. P. O’Brien and J. R. Presley (eds.), Pioneers of Modern Economics in Britain. Macmillan, London. 234–261, at p. 240.
(9) Gottfried von Haberler:
Haberler, G. 1986. “Reflections on Hayek’s Business Cycle Theory,” Cato Journal 6: 421–435.

Reprinted in Haberler, G. 1991. “Reflections on Hayek’s Business Cycle Theory,” in John Cunningham Wood and Ronald N. Woods (eds.), Friedrich A. Hayek: Critical Assessments (vol. 4). Routledge, London. 249–262.
(10) Gordon Tullock:
Tullock, G. 1988. “Why the Austrians are Wrong About Depressions,” The Review of Austrian Economics 2: 73–78.
(11) David Ramsay Steele
His views (quite insightful) are described in this comment:
I am not certain, but there may be some more discussion of the ABCT in David Ramsay Steele’s book From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (Open Court, La Salle, Ill., 1992).

(12) Allin Cottrel:
Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,” Cambridge Journal of Economics 18: 197–212.
(13) Ulrich Witt:
Witt, U. 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: 44–58.
(14) Tyler Cowen:
Cowen, Tyler. 1997. Risk and Business Cycles: New and Old Austrian Perspectives. Routledge, London.
(15) Robert P. Murphy:
Although I suppose Murphy sees himself as a defender of the ABCT, nevertheless his work here is nothing but a critique of the classic Hayekian theory (where Hayek uses the Wicksellian natural rate of interest):
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
(16) Robert L. Vienneau:
Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
A very good work on this issue is Constatinos Repapis, “Hayek’s Business Cycle Theory during the 1930s: A Critical Account of its Development,” History of Political Economy 43 (2011): 699–742.

The list above is far from complete. I may update it after further thought.

In addition, here are some criticisms of Mises’s version of the ABCT:
Vasséi, Arash Molavi. 2010. “Ludwig von Mises's Business Cycle Theory: Static Tools for Dynamic Analysis,” in Harald Hagemann, Tamotsu Nishizawa, Yukihiro Ikeda (eds.). Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Palgrave Macmillan, Basingstoke. 196–217.

Vasséi, Arash Molavi. 2010. “The Foundation of Ludwig von Mises’s Business Cycle Theory: Real Analysis as a Chain of Tautologies,” SSRN paper, June 5, 2012.


  1. Repapis is very good. Not that it's strictly necessary, but has Vienneau ever published any of this?

    Murphy doesn't hide the fact that he thinks Austrians are wrong on the natural rate of interest. As I've said on the blog before, I don't think the natural/multiple rates argument really hurts the ABCT argument at all, which is Murphy's position as well.

  2. "I don't think the natural/multiple rates argument really hurts the ABCT argument at all, which is Murphy's position as well."

    Are you willing to grant that Sraffa's critique about the non-existence of the unique Wicksellian natural rate does have force against Hayek's original theory in Prices and Production, where it does form the basis of his theory?

    1. You couldn't frame it the way Hayek frames it of course, but I can't see how that hurts the fundamental argument. Hayek has access to the same tools that Keynes does on this point, as far as I can tell. If we abandon the natural rate, we just say that when monetary policy gets easier the sorts of producers that borrower will have longer production structures than before that was the case. The natural rate is a nice way for Hayek to draw a line in the sand, but I can't see how this is a death blow.

  3. The biggest problem with the ABCT has to do with its appeal to the loanable funds theory. Simply put: to appeal to the loanable funds theory is to reject subjective expectations. This, I think, was what Lachmann was trying to imply, and is a criticism much expanded by Post Keynesian literature. Actually I am surprised that Greg Hill is not on this list. Have you read the debate he had with Horwitz in the Critical Review journal?

    (1)Hill, Greg. 1996. The Moral Economy: Keynes's Critique of Capitalist Justice. Critical Review 10: 411-34

    (2)Horwitz, Steve. 1996. Keynes on capitalism: Reply to Hill. Critical Review 10 (Summer): 353-72

    (3)Hill, Greg. 1996. Capitalism, Coordination, and Keynes: Rejoinder to Horwitz. Critical Review 10: 373-87

    (4)Horwitz, Steve. 1998. Keynes and Capitalism One More Time: A Further Reply to Hill. Critical Review 12 (Winter-Spring): 95-111

    (5)Hill, Greg. 1998. An ultra-Keynesian strikes back: Rejoinder to Horwitz. Critical Review 12: 113-26

    1. I will have a read of these articles this week.


  4. There is a lot of stuff targeted at the Austrian school. Any reason for that?

  5. There has been so much theoretical and empirical objections against ABCT from such large varity of economist that one wonder it´s even mentioned today.To just name a few, Irving Fisher in his credit cycles and debt-deflation theory ,Gunnar Myrdal in his critique of Wicksell's monetary theory ,John Hicks, Frank Knight, Erik Lundberg , Henry Simons, J. M. Clark,Alvin Hansen,Roy Harrod, Paul Samuelson,Simon Kuznets, Milton Friedman,Paul Krugman etc.