Hayek's early cycle theory re-examined

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This paper examines two aspects of Hayek’s cycle theory of the early 1930s, as expressed in the two complementary works Monetary Theory and the Trade Cycle(original German edition 1929, English translation 1933, reprinted 1966; henceforth referred to as MTTC) and Prices and Production(first edition 1931, revised edition 1935). The first aspect concerns Hayek’s methodological approach to the analysis of the trade cycle, his particular conception of the task of monetary theory, and the connection between equilibrium analysis and the cycle. In this context I consider two relationships: that between Hayek’s work and Keynes, and that between Hayek and New Classical analyses of the cycle. Both Keynes and Robert Lucas found something to commend in Hayek’s general methodological positions (although Keynes obviously flatly rejected the substantive conclusions of Hayek’s work, and it seems to me that Lucas would not be very comfortable with those conclusions either), and this potentially makes Hayek an interesting focal point. The second aspect concerns Hayek’s analysis of the role of changes in the ‘structure of production’ over the course of the cycle, and the connection between such changes and the credit system. This is the object of investigation in lectures 2 and 3 of Prices and Production; it is also the object of a searching critique in Sraffa’s Economic Journal review of 1932. I propose to set out an explicit formal example of the kind of transition between structures of production that Hayek discusses. With the help of this ‘transition table’ we can assess the merits of certain of Sraffa’s objections; I believe that this approach also sheds some light on the questions raised by Hicks in his Hayek Story (1967). 1