Abstract

The paper deals with the effect of Piero Sraffa's review of "Prices and Production" on the evolution of Hayek's theory. It is contended that, though Hayek never referred to Sraffa's review in his reformulation of the theory of trade cycle and capital in the 1930s, an important shift in emphasis concerning Hayek's assessment of non-monetary causes of the business cycle must be related to Hayek's reply to a specific question raised by Sraffa. In particular, it is argued that Hayek's first mention that the model of a real economy on which his trade cycle theory is based is not satisfying, a theme which pervades almost the whole of Hayek's work until "The Pure Theory of Capital", is to be found in his reply to Sraffa's argument that investment may be abortive with or without money.