Hayek And Business Cycle
Friedirch August von Hayek was born in Vienna on May 8, 1899 and died on March

23, 1992, in the city of Freiburg in Breisgan in Germany. Hayek was a central
figure in 20th-century economics and he represented the Austrian tradition.

After Hayek served military service, he became a student at the University of

Vienna where he got his doctorate in law and political science. In 1923-4, Hayek
visited New York and then returned to Vienna where he continued his work. Hayek
became the first director of the Austrian Institute for Business Cycle Research
in 1927. He also gave some lectures in England at the London School of Economics
in 1931. In England, he participated in such debates as monetary, capital, and
business-cycle theories during the 1930s. Hayeks' contributions were very
important. To describe, business cycles, one has to examine the historical
record of a nation's overall economic performance. "It is a pattern of
long-term growth marked by alternations of expansion and contradiction. These
recurrent alternations above and below the long-term trend are business
cycles" (Outhwaite, 55). The term "economic fluctuations" is used
to describe the same phenomena. Economists have distinguished many cause of the
business cycle. There are some factors outside the economic system and those
within it. Outside causes such as war and major inventions are referred to
exogenous factors. Whereas "endogenous factors belong to the internal
working of the economy itself and its tendency to fluctuate over extended
periods" (Outhwaite, 56). Before World War II, the emphasis was put on
endogenous factors, and thus theories such as monetary; overinvestment;
underconsumption; psychological were more important than others. In general, all
cycle theories involve some kind of cost maladjustment. F. A. Hayek was one of
the many economists who, indeed, explained overinvestment theory in a monetary
sense. Overinvestment theory is related to the overproduction-type theories.

Those theories include consumer goods, capital goods, or investment of money or
credit. "They may stress fixed capital against circulating or liquid
capital" (Haney, 667). However, the overinvestment theory assigned a
crucial role to the acceleration principle, according to which "a mere
decline in the rate of increase in business sales could give rise to an absolute
decline in the production of investment goods" (Outwaite, 56). Hayek
examined the role of money and the banks in causing economic fluctuations. He
showed how sudden injection of credit into economy could cause changes in the
relative prices between goods and lead to overinvestment that cannot be
maintained. "When money and credit vary, it sets up a train of events which
draws resources into places where they would not normally go. In particular, an
increase in credit stimulates investment" (Butler, 8). Thus, Hayek shows
that it is a response to the false signal of new credit being created, and
therefore this investment cannot be maintained. Hayek concentrates on the
initial disturbance that starts a cycle. It is used to create new bank credit in
the shape of unwarranted advances to enterprises. He considers money (credit) as
a factor to explain the cycle theory. The elasticity of the money supply (MV) is
what allows and facilitates the disequilibria of business cycles. By expanding
the currency, malinvestments in capital are generated, which are not productive
enough to be maintained (Haney, 681). Having said this, Hayek makes two points
here. He talks about "voluntary saving" and enterprisers' anticipation
of rising prices. The former is concerned with the changes in capital structure
brought about by changes in the volume of money. It is the difference between
"voluntary saving" and the creation of new credit currency by banks.

In particular, Hayek describes the self-reversing real effects of credit
expansion. He states that "all new capital goods which are created with the
help of a credit expansion ("voluntary" savings being constant) will
be destroyed during the crisis which necessarily follows the upward phase of the
cycle" (Colonna, xi). The new credit currency is considered to be inflation
and cannot be maintained whereas voluntary savings are production and can be
maintained. In Hayek's words In a free market society newly created money can
never take the place of true voluntary savings: money expansions do not have
temporary distorting effects on the price system and on the directions of
production, but these effects are not in harmony with the free choices of the
consumers, money will never be able to change permanently the relative scarcity
of capital (Colonna, xi). By saying this, Hayek showed the integration of
monetary and capital theory. In his second point, Hayek discusses how important
the enterprisers's anticipation of rising prices is. "The entrepriser,
anticipating rising prices, and aided by money rates below