Hayekian Business Cycle Theory

Hayekian Business Cycle Theory explains that economic booms and busts result from government and central bank interventions that distort natural interest rates. When artificially low interest rates are set, businesses borrow more than they should, leading to overinvestment in certain sectors. This misallocation creates an unsustainable expansion, which eventually results in a correction or recession when the true preferences of consumers reassert themselves. The theory emphasizes that healthy economic growth depends on free markets and accurate interest rate signals, with distortions causing the cycle of boom and bust.