Hayek's Economic Theory Essay Example | Topics and Well Written Essays - 1750 words

Hayek's Economic Theory - Essay Example history. The Hayekian business-cycle theory is a fusion of the Austrian theories regarding money, capital as well as prices, generally conceptualized as the Austrian theory of business cycles, which itself was based on Mises’ theory of money and credit (Boeettke, 1992). The Austrian theory of trade cycles was inspired by Knut Wicksell’s contributions on the relationship between money and interest while Ludwig von Mises became the first economist to bring together Wicksell’s monetary dynamics with Bohm-Bawerk’s capital theory, which led to the first Australian trade-cycle theory. Hayek developed and made the theory official while reinforcing it with insights from David Ricardo and John Stuart Mill in 1967. Generally, Hayek argues that any monetary disturbance such as an increase in the stock of money reduces the interest rates to levels below the equilibrium thereby stimulating an increase in capital and reallocation of resources in the manufacture of intermediate (capital) goods rather than consumption goods (White, 1999). Consequently, this triggers a rise in the cost of capital goods and a subsequent drop in the price of capital goods, and later the entire structure of the production system, which entails the conversion of raw products into finished products for utilization by consumers, is completely shifted (Zera, 2013). In that respect, the Hayekian Economy theory demonstrates how a monetary disruption can prompt an inter-temporal disco-ordination in economic activities, the manner in which the disco-ordination eventually becomes recognized and addressed through money-induced disco-ordination. Hayek conceptualizes that the injection of new money through credit markets inhibits the level of interest thereby inducing an inter-temporal misallocation of resources, thus, leading to the production of capital goods that are