Hayek's Analysis Helped Changed the Direction of Austrian Economics from Micro Theory to Macro Theory

Hayek’s Prices and Production became the catalyst of controversy with the Keynesian circle at Cambridge. His book established a new approach which rivaled Keynes’s blossoming theory of aggregate demand and countered demands for big government during the great depression. What made Hayek’s analysis so appealing was his ability to change the direction of Austrian economics from micro theory to macro theory. This shift was essential if free-market economists were going to justify a laissez faire anti-depression policy. Hayek employed the Mengerian stages-of-production approach to develop a new way to analyze the whole economy, monetary policy and the business cycle, quite apart from the contemporary economic orthodoxy. This novel method was essential since standard classical economics seemed to be unable to cope with the growing economic abyss in the 1930s.

As O’Driscoll summarized Hayek’s efforts:

Hayek called for an entire restructuring of economic theory. In part, he was attempting to counter the revived interest in the general equilibrium theories — the neo-Walrasian and neo-Paretian theories of the 1930s as found, for example, in John R. Hicks’ writings.

[H]is work is viewed as providing a basis for a radical alternative to the “neo-classical” paradigm of efficient allocation with timeless production, perfect anticipation, costless exchanges, (almost) instantaneous attainment of equilibrium, and a world of no institutions . . .

—Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), 42.