Mr. Hayek and the Classics; A Suggested Interpretation of the Business-Cycle theory in Prices and Production

Herger, Nils (2021). Mr. Hayek and the Classics; A Suggested Interpretation of the Business-Cycle theory in Prices and Production. The quarterly journal of Austrian economics, 24(1), pp. 79-109. Mises Institute 10.35297/qjae.010087

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This paper endeavors to develop a modern theoretical underpinning of
Friedrich August von Hayek’s business-cycle theory as published during the Great
Depression in his book Prices and Production. According to Hayek, economic cycles are
caused by monetary shocks, which distort the relative-price schedule across economic
sectors. Possible consequences of these price distortions, which are also called “Cantillon
effects,” include malinvestment and an unsustainable production structure, which
sooner or later has to be corrected by a recession. It turns out that this type of economic
fluctuation can be condensed into a simple two-sector overlapping generations model.

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