Hayek’s Theory of Business Cycles: A Theory That Will Remain Obscure?

Hayek’s theory of business cycles has been criticized for its unfeasible policy prescriptions, weak empirical support, and lack of technical rigor. Although the theory can be defended against these criticisms, it violates the rational expectations hypothesis, a criterion by which economists tend to judge the quality of economic arguments. Since Hayek and his followers failed to remedy the violation, the theory in its present form cannot capture the interest of the economics profession. This outcome might be avoidable. However, to change it, Hayek’s theory either needs a satisfactory restatement, or it must wait until economists change their criteria for judging the quality of arguments. [ABSTRACT FROM AUTHOR]