Hayek and the business cycle today

 

Friedrich Hayek lost the battle for explaining business cycles. Keynes and his story surrounding the impact of aggregate demand won the day and lead to the monetary and fiscal policy revolution which dominates our thinking today. Hayek's views on capital theory are more acceptable, but it should not be forgotten that the premise of much of Hayek's thinking was focused on the coordination problem across a large number of workers and businesses. 

For Hayek, prices are the key to coordination and also the place where there will be business cycle dislocations. If prices are distorted from adverse market shocks or governments, then there will be a failure in market coordination, business will fail, consumers will make wrong choices, workers will not know how to price their services. 

There are supply chain issues and there are issues with measuring the baskets of goods that consumers buy. These shifts and bottlenecks lead economic agents to make bad decisions which will impact the success and failure of firms. Distortions from the pandemic are not often easily reversible. Policy has flooded money through monetary and fiscal policy into the economy. Regulations have changed incentives and behavior. All of these make it harder to price good and services and for consumers to make effective buying decisions. Mistakes will occur. Purchases will be delayed. 

There will be a period of time necessary for the coordination to work itself out. Even if there is government support through fiscal and monetary policy, there can still be coordination failure. More money cannot solve the problem of poor knowledge. We have seen the initial reflation, but the relative adjustment process will now dominate growth. 

Ask yourself a simple question. Is there a lack of aggregate demand in global economies or is there a price coordination problem?