To Understand Hayek’s “The Pure Theory of Capital” Is to Question the Relevance of Mainstream Economics

The protracted and interwoven development of Hayek’s capital theory and business cycle theory was set against the background of an intense rivalry between Hayek and Keynes in the 1930s. Hayek had seen that ‘an elaboration of the still inadequately developed theory of capital was a prerequisite for a thorough disposal of Keynes’s argument’ (Hayek, 1983, p. 46); and, in retrospect, he considered it an error of judgement that he had given no time to an immediate and studious critique of Keynes’s General Theory. So, in addition to serving Hayek’s own exposition of a monetary theory of business cycles, The Pure Theory of Capital serves to expose the fallacy of the central tenet of Keynes’s General Theory — one that sits firmly in the mainstream of modern economics — for a ‘direct dependence of investment on final demand’ (Hayek, 1983, p. 48). Yet, Hayek’s exposé remains generally ignored, with the effect that Keynesian demand management (macroeconomics) together with marginal analysis (microeconomics) remain the dominant instruments of economic analysis. The issues could scarcely be more important. To understand The Pure Theory of Capital is to question the relevance of mainstream economics.

—Gerald R. Steele, “Hayek’s Pure Theory of Capital,” in Elgar Companion to Hayekian Economics, ed. Roger W. Garrison and Norman Barry (Cheltenham, UK: Edward Elgar Publishing, 2014), 71-72.