Addressing Hayek's Challenge: Sticky Consumption, Sequestered Capital, and ABCT
25 Pages Posted: 17 Oct 2017 Last revised: 11 Nov 2017
Date Written: October 13, 2017
F.A. Hayek’s trade cycle theory was triumphant in the early 1930s, but withered within a decade as criticisms went unanswered. Hayek challenged others to “prove” theoretically what he “knew” intuitively about business cycles. In the late 1990s, Roger Garrison produced a logically sound and pedagogically persuasive model that answers most criticisms. Unfortunately, the volatile path of consumption required by this model is empirically at odds with a body of empirical work that indicates that consumption is sticky. To address this, we modify Garrison’s model to identify not just the capital usages in the stages of production, but also pre-production (R&D) capital that is deliberately sequestered. With sequestered capital in play, sticky consumption can be logically accommodated, providing an answer to Hayek’s challenge.
Keywords: Sticky Consumption, Sequestered Capital, Austrian Business Cycle Theory, ABCT, Hayek's Challenge, Roger Garrison, Hayek, Business Cycles
JEL Classification: El 4, E21, E32
Suggested Citation: Suggested Citation