If a bank does not expand circulation credit by issuing additional fiduciary media (either in the form of banknotes or in the form of deposit currency), it cannot generate a boom. —Ludwig von Mises, Human Action 1 Sir John Hicks in 1967, in his critique of Friedrich A. Hayek’s trade cycle theory, argued that Hayek’s theory was not a theory of the credit cycle. It was instead, an analysis—a very interesting analysis—of the adjustment of an economy to changes in the rate of genuine saving. In that direction it does make a real contribution. But it is a contribution which, when it was made, was out of due time. It does not belong to the theory of fluctuations, which was the centre of economists ’ attention in 1930; it is a fore-runner of the growth theory of more recent years. In that application we can still make something of it. (Hicks 1967, pp. 210-11) A capital-based macroeconomics as developed in Garrison (2001) provides an extended graphical framework of a Hayekian model in a growth context that maintains, clarifies, and expands the cycle aspects of the model. Growth may be sustainable when it is preference-induced growth. Policyinduced growth is unsustainable growth and as such induces cycles into th
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