From an interview with Milton Friedman:
EPSTEIN You were acquainted with the Austrian economist Friedrich Hayek and also are familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. When you were talking about bad investments, you were alluding to Austrian business-cycle theory. A certain concept that has pretty much gone into our parlance and understanding fits in with what you said about what happened in Asia. There can be times and conditions in which the stage can be set for malinvestment that leads to recession.
FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.
This view was later accepted by men such as Ben Bernanke and Bradford DeLong. Apart from the fact that the Federal Reserve hardly allowed the economy to liquidate without attempts to re-inflate the money stock, Hayek’s major work on business cycle theory was not published into English until after 1930. In Monetary Theory and the Trade Cycle, Hayek makes reference to the Federal Reserve’s attempts to inflate the money supply after the October 1929 stock market crash, and this view is reinforced by Murray Rothbard’s America’s Great Depression.
Lawrence White gives a more correct impression of Hayek’s and Robbin’s influence during the Great Depression: Did Hayek and Robbins Deepen the Great Depression?
