When I wrote my master thesis many years ago the topic was a mathematical formalization of Austrian Business Cycle Theory. In hindsight I think it is incredible that I able to pull it off and I am still pretty happy with that master thesis. It, however, convinced me that Hayek’s version of Austrian Business Cycle theory was seriously flawed. Furthermore, the math in my modeling never really satisfied me. It was just not good enough.

Now somebody more clever than me have tried a similar exercise.Here is the abstract from a new paper from the talented Arash Molavi Vasséi:

“This paper provides a systematic translation of F.A. Hayek’s informal exposition of capital theory in Utility Analysis and Interest and The Pure Theory of Capital into a model. The underlying premise is that Hayek adopts infant versions of `modern’ analytical tools such that a rational reconstruction of his capital theory by established neoclassical tools is admissible. The major result is that Hayek’s capital theory contains a generalization of the Ramsey-Cass-Koopmans model. In concrete, Hayek provides the solution to an infinite-horizon deterministic social planner optimization problem in a one-sector economy such that the rate of pure time preference encapsulated in the discount factor increases in prospective utility. With respect to stability properties, he emphasizes that the system converges even in the special case of constant returns to per-capita accumulation.”

How cool is that? Pretty cool if you ask me, but take a look at the paper yourself.

PS Arash has promised me that his next project will be on NGDP targeting and/or Market Monetarism.
PPS I hope you all remember Arash’s clever discussion on (dis)equilibrium in Market Monetarism.