Hayek's Business Cycle Theory During the 1930s: A Critical Account of Its Development

Hayek's business cycle theory in the 1930s was pioneering both in developing the general equilibrium framework and in integrating capital with monetary theory. From published and unpublished work and correspondence a more complete picture of the evolution of Hayek's thought emerges. This article traces how Hayek's effort to produce a consistent business cycle theory led him to redevelop important parts of capital theory and the theory of expectations. The inherent difficulties of dealing with the durability of capital goods in an Austrian framework, as well as his evolving views on knowledge and expectations, led him to abandon his project of developing a definitive version of Austrian business cycle theory.