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Summary Of Hayek's 'The Austrian Business Cycle'

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Hayek’s explanation of an economy’s business cycle “The Austrian Business Cycle”:
In his book “Prices and Production”, Hayek’s argued that any business cycle commence as a result of a monetary policy or approach that is adopted by governments. Hayek agreed with Adam’s Smith theory of free markets. He argued that despite the fact that markets evolved over time as a result of human actions, at a certain stage markets fail resulting in unemployment and inefficient allocation of resources. On analyzing the factors behind markets failure, Hayek suggested that the reason behind fluctuations in the stability of markets was the intervention of governments in the monetary equilibrium of economies.
There he argued for a monetary approach to the origins …show more content…

On the other hand, when the Federal Reserve sets the interest rate higher than its natural rate, in an attempt to control consumption and increase savings in the absence of controlled credit procedures to control inflation. However, these solutions are not sustainable over the long run. Hayek was convinced that the adoption of contractionary or expansionary monetary policy to stabilize prices will not eliminate cyclical fluctuations. In contrast with Wicksell, Hayek’s view on monetary equilibrium was not related to the equilibrium price level, but with the foundation of relative prices. Thirdly, Hayek built upon Bohm Bawerk “theory of capital” in the essence of production time. In which it was implied that the value of future goods decreases as the duration of their production completion increases, thus present goods’ is of higher value than future goods. Fourthly, when the economy is in equilibrium, money is neutral and relative goods’ prices are undisturbed. When the market interest rate and the equilibrium interest rate differs especially when market Interest rate is lower than the equilibrium rate, cyclical fluctuations occur, …show more content…

Hayek suggested that a central arranging power might need will be enriched for authority that might influence and eventually control social life, Since the learning needed for centrally arranging an economy is naturally decentralized, Furthermore might require to be brought under control. Though Hayek claimed that the state ought for providing and sustaining law centrally, others have barbed out that this rejects as much disputes his arguments about the role of judges in "discovering" the law, proposing that Hayek might have backed decentralized provision about legal

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