Sam Bowman and George Selgin say that Hayek deserves more credit than he’s getting, because the Austrian theory of the business cycle seems to fit the boom and bust of recent years rather well.
But it’s not just Hayek who had a theory that roughly fits the recent facts. So did Marx. He too described how a lack of real profit opportunities leads to what Austrians call malinvestments: “The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises.”
And in a chapter entitled “Credit and Fictitious Capital” he describes the boom of the mid-1840s. This was founded in part upon what we’d now call irrational exuberance. He cites a Mancunian manufacturer rejoicing in the opening up of Chinese markets after the Opium War: How can we ever produce too much? We have to clothe 300 million people."
And he describes how over-expansion was founded upon cheap and easy credit:
The enticingly high profits had led to far more extensive operations than justified by the available liquid resources. Yet there was credit-easy to obtain and cheap…Why then allow this splendid opportunity to escape? Why not go in for all one was worth? Why not send all one could manufacture to foreign markets which pined for English goods?…
Thus arose the system of mass consignments to India and China against advance payments, and this soon developed into a system of consignments purely for the sake of getting advances…which led inevitably to over-flooding the markets and a crash.
Now, I don’t say this to make any sectarian claim about whether Marx had a better or equal theory of cycles than Hayek, or who was the greater thinker. I believe - sometimes, I fear, uniquely - that we can learn a lot from both.
Instead, I do so to note that, in one sense, Hayek and Marx were on the same side of the fence - the fence being between those who think in terms of equilibrium and those who don’t.
In the 19th century, this distinction took the form of Marx (and before him Malthus) arguing against Say’s law. Now, it takes the form of Austrians and various Minskyans and Keynesians arguing against (some) DSGE models.
Plus ca change, as Say would have said.