Equilibrium Theory and Economic Fluctuations

The popularity of business cycle theories, it is often said, appears to be subject to cyclical fluctuations itself. This paper addresses two of the theoretical problems which might provide reasons for such an observation. The first concerns the reconciliation of business cycle and general equilibrium theory, while the second considers, more generally, the link between short run economic fluctuations and the long run theory of growth. Both topics are addressed by comparing recent theoretical developments with the debate in the interwar period, with an emphasis on Hayek's contribution to business cycle theory. It is argued here that a re-interpretation of Hayek's theory as an attempt to model short run fluctuations where rationality is bounded provides an alternative starting point for modeling path dependent behaviour which is overlooked when Hayek's work is considered a precursor of equilibrium business cycle theory, failing simply for a lack of formal sophistication.