There can be no better time than now to grapple with Hayek’s most broad ranging book on the problems of money and the trade cycle, at a time when economists are again opening their minds to the fundamental questions of monetary theory and the business cycle. Hayek’s book brings to light many deep problems of money and cycle theory, grappling with the kind of fundamental problems most economists hide from or don’t recognize. And the book is chock full of references to all sorts of important pre-Keynesian thinkers on money and cycle theory, providing access to a world of causation and ideas most economists — locked in a causally un-realizable world of Keynesian aggregates and microeconomically unfounded math constructs — are blocked from imagining.
Let’s dig right in, beginning right in the heart of the book, with the start of chapter IV:
The Fundamental Cause of Cyclical Fluctuations
So far we have not answered, or have only hinted at an answer to the question why, under the existing organization of the economic system, we constantly find those deviations of the money rate of interest from the equilibrium rate (76) which, as we have seen, must be regarded as the cause of the periodically recurring disproportionalities in the structure of production. The problem is, then, to discover the gap in the reaction mechanism of the modern economic system that is responsible for the fact that certain changes of data, so far from being followed by a prompt readjustment (i.e., the formation of a new equilibrium) are, actually, the cause of recurrent shifts in economic activity that subsequently have to be reversed before a new equilibrium can be established.
(76) The term “equilibrium rate of interest” which, I believe, was introduced into Germany in this connection, by K. Schlesinger in his Theorie der Geld und Kreditwirtschaft (München and Leipzig, 1914, p. 128) seems to me preferable in this case to the usual expression of “natural rate” or “real rate.” Alfred Marshall used the term “equilibrium level” as early as 1887 (cf. Official Papers of Alfred Marshall, p. 130). Cf. also chap. v. of the present work.
I’ll begin our discussion with the next posting.