abstract Cowen and I agree that rational‐expectations theory is unrealistic and that risk is difficult to quantify. However, we continue to disagree about the riskiness of consumption as opposed to investment. Since more investment might lead to a recession if investment is relatively risky, Cowen's use of rational‐expectations theory to buttress the Austrian school's claim that market economies can shift toward relatively more investment without experiencing macroeconomic disruption remains suspect.

The Great Recession has brought with it a renewed interest in Hayek's business-cycle theory, which holds that loose monetary policy generates an unsustainable boom characterized by a lengthening of the capital structure. Hayek's theory has received robust criticism for decades, although the criticisms have varied in quality. Various empirical disconfirmations pose the most serious challenge. The small empirical literature on the subject generally confirms Hayek's predictions about variations in the capital structure, but has not persuasively linked the capital structure to (...) the business cycle. A better option, then, may be to abandon Hayek's business-cycle theory, preserve his capital theory, and graft it onto a Keynesian or monetarist understanding of the business cycle that is more consistent with modern macroeconomics. (shrink)

G.L.S. Shackle stood at the historic crossroads where the economics of Hayek and Keynes met. Shackle fused these opposing lines of thought in a macroeconomic theory that draws Keynesian conclusions from Austrian premises. In Shackle 's scheme of thought, the power to imagine alternative courses of action releases decision makers from the web of predictable causation. But the spontaneous and unpredictable choices that originate in the subjective and disparate orientations of individual agents deny us the possibility of rational expectations, and (...) therewith the logical coherence of market equilibrium over time. (shrink)