With the Eclipse of Austrian Economics in the 1930s, a Key Perspective on the Importance of the Economy’s Supply Side in Economic Fluctuations Was Lost

After the publication of the General Theory, which Hayek never formally reviewed, and the apparent triumph of Keynesianism, Hayek’s The Pure Theory of Capital was virtually ignored. The Pure Theory was an attempt by Hayek to provide theoretical foundation for an eventual fully developed theory of a money-production economy to compete with Keynes’s “general” theory. Sadly, the whole debate became a mostly forgotten side note in the history of economic thought. What was lost? Backhouse and Laidler  sum it up nicely: “With the eclipse of Austrian Economics in the 1930s, a key perspective on the importance of the economy’s supply side in economic fluctuations was lost.” By ignoring that current investment has an impact on not just the size but also the composition of the future capital stock, Keynes and IS-LM Keynesians, to an even greater degree, lost sight of key insights developed most fully by the Austrians but also by Keynes’s English contemporaries, such as Robertson,  that “mistaken investment decisions made in the present had a capacity to disrupt future equilibria between supply and demand” in either the economy as a whole or in key sectors.

--John P. Cochran, "Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians," in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 166.