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

526 Money, Bank Credit, and Economic Cyclesempirical features which largely coincide with those observedin all cycles from the time they began.Friedrich A. Hayek stated that hischief objection against [monetarist] theory is that, as what iscalled a “macrotheory,” it pays attention only to the effectsof changes in the quantity of money on the general pricelevel and not to the effects on the structure of relative prices.In consequence, it tends to disregard what seems to me themost harmful effects of inflation: the misdirection ofresources it causes and the unemployment which ultimatelyresults from it. 23It is easy to understand why a theory such as the one monetaristshold, which is constructed in strictly macroeconomicterms with no analysis of underlying microeconomic factors,must ignore not only the effects of credit expansion on theproductive structure, but also, in general, the ways in which“general price level” fluctuations influence the structure of relativeprices. 24 Rather than simply raise or lower the general23 Hayek, New Studies in Philosophy, Politics, Economics and the History ofIdeas, p. 215. Near the end of his life, Fritz Machlup commented on thesame topic:I don’t know why a man as intelligent as Milton Friedmandoesn’t give more emphasis to relative prices, relative costs,even in an inflationary period. (Joseph T. Salerno and RichardM. Ebeling, “An Interview with Professor Fritz Machlup,”Austrian Economics Newsletter 3, no. 1 [Summer, 1980]: 12)24 The main fault of the old quantity theory as well as the mathematicaleconomists’ equation of exchange is that they haveignored this fundamental issue. Changes in the supply ofmoney must bring about changes in other data too. The marketsystem before and after the inflow or outflow of a quantityof money is not merely changed in that the cash holdingsof the individuals and prices have increased or decreased.There have been effected also changes in the reciprocalexchange ratios between the various commodities and serviceswhich, if one wants to resort to metaphors, are more adequatelydescribed by the image of price revolution than bythe misleading figure of an elevation or sinking of the “pricelevel.” (Mises, Human Action, p. 413)