Professor Alec Macfie writes what amounts to a lost classic in business-cycle theory. Theories of the Trade Cycle came out in 1934, partly under the influence of F.A. Hayek who had brought with him to London the insight he gained from his work in Vienna. His insight focused on the role of interest rates in generating the trade cycle — particularly rates manipulated by the central bank. Macfie weighs Hayek's point against prevailing business-cycle theory, and presents what was surely the clearest explanation in English at the time.

We gain from this book a clearer picture of what business-cycle theory taught at the time before Keynes came to dominate the profession, and we are able to discern where these theories went wrong. Along the way, Macfie provides new insight to the response of entrepreneurs to cyclical movements and how price changes are distorted by central-bank policy. He also shows that central banks have massive power but that power is tremendously limited by consumer and investor behavior. His point about liquidity vs. velocity is particularly pertinent today.

The book illustrates what a huge step in the right direction Hayek's insights meant for prevailing wisdom — and what a gigantic setback Keynes's own theories really were. Macfie shows that the reluctance to embrace Hayek's views all came down to one central problem: the political impossibility of embracing bust-time liquidation and radical monetary reform as the only real solution to the business cycle. Macfie also adds to the theory some important psychological insights.

Professor Macfie taught at the University of Glasgow as successor to a chair named for (and once held by) Adam Smith. He was an important figure in his time, and his contribution was wiped out by depression and war. He is an unjustly forgotten figure because his book had wide influence in the English-speaking world.

The Laissez Faire edition is the first to appear since its initial publication. It includes a long and thoughtful essay by Doug French.

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