Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

514 Money, Bank Credit, and Economic Cyclesthe work of John Bates Clark (1847–1938). Clark was Professor ofEconomics at Columbia University in New York, and hisstrong anti-subjectivist reaction in the area of capital and interesttheory continues even today to serve as the foundation forthe entire neoclassical-monetarist edifice. 5 Indeed Clark considersproduction and consumption to be simultaneous. In his viewproduction processes are not comprised of stages, nor is there aneed to wait any length of time before obtaining the results ofproduction processes. Clark regards capital as a permanentfund which “automatically” generates a productivity in theform of interest. According to Clark, the larger this social fundof capital, the lower the interest. The phenomenon of timepreference in no way influences interest in his model.It is evident that Clark’s concept of the production processconsists merely of a transposition of Walras’s notion of generalequilibrium to the field of capital theory. Walras developed aneconomic model of general equilibrium which he expressed interms of a system of simultaneous equations intended toexplain how the market prices of different goods and servicesare determined. The main flaw in Walras’s model is that itinvolves the interaction, within a system of simultaneousequations, of magnitudes (variables and parameters) whichare not simultaneous, but which occur sequentially in time asthe actions of the agents participating in the economic systemdrive the production process. In short, Walras’s model of generalequilibrium is a strictly static model which fails to accountfor the passage of time and which describes the interaction ofsupposedly concurrent variables and parameters which neverarise simultaneously in real life.Logically, it is impossible to explain real economicprocesses using an economic model which ignores the issue oftime and in which the study of the sequential generation of5 The following are J.B. Clark’s most important writings: “The Genesis ofCapital,” pp. 302–15; “The Origin of Interest,” Quarterly Journal of Economics9 (April 1895): 257–78; The Distribution of Wealth (New York:Macmillan, 1899, reprinted by Augustus M. Kelley, New York 1965); and“Concerning the Nature of Capital: A Reply.” Clark, however, recognizedhis intellectual defeat in his debate with Böhm-Bawerk. See hisletter quoted in F.A. Hayek, “Review of John Bates Clark: A Memorial,”Economica 6 (1939): 223–24.