Review of Austrian Economics, 12: 65–80 (1999)
1999 Kluwer Academic Publishers
Austrian Cycle Theory: Saving the Wheat
while Discarding the Chaff
RICHARD E. WAGNER
ell into the 1930s, Austrian contributions to business cycles and economic
coordination stood at the forefront of economic theorizing. What is now
labeled the Austrian theory of the business cycle was articulated originally
by Mises (1912), with signiﬁcant subsequent elaboration by Hayek (1935).
While the Austrian-type formulations represented a robust research program during that
period, those formulationsprettymuch disappeared from economics in the 1940s, remaining
alive only on a periphery here and there.
The Keynesian hegemony, however, began to
disintegrate in the late 1960s. Macro texts now commonly portray a menu of conceptual
options that include Classical, Keynesian, monetarist, new Classical, and new Keynesian
varieties of macro theorizing. Despite various restatements of the Mises-Hayek insights
in recent years, the Austrian insights have experienced no renaissance within the universe
of macro theorizing. A curmudgeonly response to this observation would be that this is
because those insights now have no value to add to the understanding of macro phenomena,
principally because they have been rendered obsolete by the advance of economic theory.
Indeed, this response has been advanced by several respected economists who are familiar
with and broadly sympathetic with Austrian approaches to other economic phenomena.
Tullock (1987, p. 73) asserts that “the Austrian theory is not a serious contender [as a
theory of depression].” Cowen (1997, p. 101) presents a 13-count indictment of general
incoherence against Austrian cycle theory that can only be described as being intensely
An earlier version of this paper was prepared for presentation at a Workshop on “New Perspectives on Austrian
Economics,” at the Max-Planck-Institute for Research into Economic Systems, Jena, 7–8 August 1998. I am
particularly grateful to Nicolai Foss, Sylvie Geisendorf, Ulrich Witt, and Michael Wohlgemuth for their comments
and suggestions on the initial draft, and offer my apologies to those participants whom I neglect to mention
because of an imperfect memory. I am also grateful to Peter Boettke and Steven Horwitz for helpful comments on
a subsequent version.
That Mises and Hayek were among the most creative economists of their time whose work foreshadowed many
developments in economics in our time, with the resurgent interest in Austrian economics yet having little to do
with these developments, is characterized crisply by Foss (1995).
The Austrian theory of the cycle was called by monetary overinvestment theory in the well known work of
Haberler (1964) (though it is more aptly titled a malinvestment theory). To be sure, there was a strong Swedish
component to this so-called Austrian theory. Mises took Wicksell as his point of departure, and such Swedish
authors as Erik Lindahl and Gunnar Myrdahl made major contributions along similar lines in the 1930s. Moreover,
similar orientations toward business cycles were written in the 1930s by such non-Austrian authors as Walter
Eucken, William Hutt, Friedrich Lutz, and Wilhelm R¨opke.