The paper compares Post Keynesian and Austrian theories of the business cycle theories, focusing on the work of Hayek and Minsky. These authors both developed theories of the relationship between economic activity and the dynamics of money and credit. At first glance, the two appear to have much in common. Both argued that periods of steady economic growth lead to destabilising forces centered around processes of unsustainable credit growth and, ultimately, to crisis and recession. Modern financially advanced economies are therefore prone to endogenously-generated cyclical dynamics. This view stands in contrast with that embedded by assumption in the currently dominant dynamic stochastic general equlibrium (DSGE) models, in which business cycles are generated exogenously---either by policy errors or shifts in other factors assumed to be exogenous, such as labour productivity.

Austrian and Post Keynesian views appear to hold considerable relevance for those wishing to understand the financial crisis of 2008. The crisis was preceded by a period of steady growth and low inflation, leading to the false belief that, as Robert Lucas put it, `macroeconomics has succeeded: Its central problem of depression prevention has been solved.' As predicted by the theories of Hayek and Minsky, this period of `tranquility' turned out to have masked an unsustainable process of credit expansion which eventually led to the collapse of the financial system and a recession from which the world has not yet fully recovered.

In addition to a shared view that, in Minsky's words, `stability is destabilising', there are other clear parallels between the two theoretical frameworks. Both authors believed that the activities of the private banking system are central to the dynamics of capitalism and that the ability of that system to `endogenously' create new money is a crucial factor in generating instability.

Beyond this, however, the two authors part company. Hayek's is a theory of misallocation in physical productive capacity---what he calls `malinvestment'---while Minsky's is a theory of misallocation in financial structure, driven by psychological factors. Hayek's theory focuses on the supply side:  capacity constraints are the ultimate cause of the crisis and subsequent depression. Minsky, on the other hand, follows Keynes in arguing that capitalism oscillates around a point of under-employment. He therefore focuses on the demand side: in Minsky's theory, crisis occurs when money incomes are insufficient to ex post validate cash outflow commitments due to previous borrowing.

Minsky draws on Keynes' discussion in Chapter 17 of the General Theory and argues that in a dynamic system in which capacity constraints do not bind, the profits of firms are not determined by the marginal productivity of capital but, instead, are Marshallian quasi-rents. He rejects what he regards as Keynes' mistaken conflation of the marginal efficiency of capital with the neoclassical theory of distribution. This is a fundamental difference with Hayek's `triangles' theory of capital structure---essentially an extension of Wicksellian neoclassical theory to incorporate time taken in production. In Minsky, profit income sufficient to cover debt commitments can always be generated so long as aggregate expenditure is high enough. (Minsky struggled to reconcile his microeconomic balance sheet analysis of financial fragility with Kalecki's macroeconomic identities showing that corporate profits are determined by the level of business investment spending.)

For Hayek, in contrast, excess aggregate demand caused by debt-financed investment is the cause of capital misallocation and ultimately to supply shortages. Since the production process takes time, in Hayek's model there always exists a stock of partially completed consumer goods. This allows additional resources to be commited to capital investment without an immediate corresponding decrease in consumption---even in a position of full employment. Labour can be shifted from the earlier stages of `less roundabout'---i.e. capital intensive---production processes to the initial stages of `more roundabout' processes without diverting labour from working on near-complete consumer goods production. As such, even at full employment, labour can be shifted to higher-capital intensity production processes without distrupting the supply of consumer goods in the short run.
Hayek's model therefore describes the interaction of a credit money system and the supply side of the economy. Minsky's theory, instead, describes the interaction of the financial system with the demand side of the economy. Rates of return on financial investment are ultimately real variables in Hayek, while they are monetary (i.e. distributional) variables in Minsky. While Minsky's analysis largely ignores supply side issues, it includes a richer characterisation of the financial system than Hayek. For Minsky, the boom is characterised by increasing leverage and the `layering' of debts. Minsky emphasises institutional change and the development of new financial products as factors leading to the `elasticity of credit'---while Hayek relies on a more straightforward Wicksellian pure credit system.

Despite the differences, another parallel emerges between the two authors: both faced challenges in isolating the mechanism which causes the turning point at the top of the business cycle. Several possible causes of the upper turning point can be identified in Minsky's theory: these include increases in central bank interest rates in response to inflationary pressures, and shifts in the liquidity preference of investors, firms or commercial banks. Although Hayek was determined to avoid a theory which relies on the `deus ex machina of a false step by bankers' to explain the upper turning point, he did not succeed. He modified his original theory to avoid reliance on labour shortages to trigger the crisis---he was criticised by Kaldor and others for his inability to explain credit cycles in a system characterised by persistent unemployment. But in  incorporating an elastic supply of labour, he became reliant on shifts in interest rates to cause the tipping point. His repeated attempts to overcome these issues and construct a `general' theory of business cycles pushed him ever closer to positions taken by Keynes and Kalecki---later versions of his theory relied on concepts all but indistiguishable from those put forward by Kalecki in his `Principle of Increasing Risk'. These concepts, in the form of `lenders' risk' and `borrowers' risk' are central to the `two-price theory' at the centre of Minsky's Financial Instability Hypothesis.