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

A Critique of Monetarist and Keynesian Theories 519Years after Böhm-Bawerk, fellow Austrian Fritz Machlupvoiced his strong criticism of the Clark-Knight theory of capital,concluding that[t]here was and is always the choice between maintaining,increasing, or consuming capital. And past and “present”experience tells us that the decision in favour of consumptionspendthrifts a useful factor in social economy, because whatis saved is not spent and so producers cannot find a market.(Böhm-Bawerk quoted in Classics in Austrian Economics,Kirzner, ed., vol. 1, p. 137)Mises reaches the same conclusion when he censures Knight for hischimerical notions such as “the self-perpetuating character”of useful things. In any event their teachings are designed toprovide a justification for the doctrine which blames oversavingand underconsumption for all that is unsatisfactoryand recommends spending as a panacea. (Human Action, p.848)Further Böhm-Bawerk criticism of Clark appears mainly in his essays,“Capital and Interest Once More,” printed in Quarterly Journal of Economics(November 1906 and February 1907): esp. pp. 269, 277 and280–82; “The Nature of Capital: A Rejoinder,” Quarterly Journal of Economics(November 1907); and in the above-cited Capital and Interest.Moreover the fact that Böhm-Bawerk’s “average production period”idea was misconceived, a fact recognized by Menger, Mises, Hayek,and others, in no way justifies the mythical concept of capital Clarkand Knight propose. The members of the Austrian School have unanimouslyacknowledged that Böhm-Bawerk made a “slip” when heintroduced the (non-existent) “average production period” in hisanalysis, since the entire theory of capital may be easily constructedfrom a prospective viewpoint; that is, in light of actors’ subjective estimatesregarding the time periods their future actions will take. In factHayek states,Professor Knight seems to hold that to expose the ambiguitiesand inconsistencies involved in the notion of an averageinvestment period serves to expel the idea of time from capitaltheory altogether. But it is not so. In general it is sufficientto say that the investment period of some factors has beenlengthened, while those of all others have remainedunchanged. (F.A. Hayek, “The Mythology of Capital,” QuarterlyJournal of Economics [February 1936]: 206)