ABSTRACT
Hayek’s triangle is an intuitive and useful expository device. It illustrates the argument that the degree of roundaboutness (i.e., number of stages of production) that can be sustained depends on the time preference of consumers. The simplifications introduced in Hayek’s triangle in Prices and Production, after some initial accolades, produced a storm of criticisms. His model invited confusion and contributed to the rejection of Bohm-Bawerk’s capital theory, which is also the distinctive component of the Austrian, business-cycle theory (ABCT). Nevertheless, Hayek still attempted to preserve what he knew was true, namely the implications of the ABCT that a fall in the money interest rate would lead on net, in equilibrium, to an increase in the number of “long” investment periods. The inspiration for much contemporary empirical research on the ABCT is Garrison’s use of Hayek’s triangle. This line of work investigates whether different industries (stages of production) behave as predicted by Garrison’s model representation of the ABCT.
