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

A Critique of Monetarist and Keynesian Theories 527price level, fluctuations in credit constitute a “revolution”which affects all relative prices and eventually provokes a crisisof malinvestment and an economic recession. The inabilityto perceive this fact led the American economist Benjamin M.Anderson to assert that the fundamental flaw in the quantitytheory of money is merely that it conceals from the researcherthe underlying microeconomic phenomena influenced byvariations in the general price level. Indeed monetarists contentthemselves with the quantity theory’s equation ofexchange, deeming all important issues to be adequatelyaddressed by it and subsequent microeconomic analyses to beunnecessary. 25The above sheds light on monetarists’ lack of a satisfactorytheory of economic cycles and on their belief that crises anddepressions are caused merely by a “monetary contraction.”This is a naive and superficial diagnosis which confuses thecause with the effect. As we know, economic crises arisebecause credit expansion and inflation first distort the productivestructure through a complex process which later manifestsitself in a crisis, monetary squeeze, and recession.Attributing crises to a monetary contraction is like attributingmeasles to the fever and rash which accompany it. This explanationof cycles can only be upheld by the scientistic, ultraempiricalmethodology of monetarist macroeconomics, anapproach which lacks a temporal theory of capital. 2625 The formula of the quantity theorists is a monotonous “tit-tattoe”—money,credit, and prices. With this explanation theproblem was solved and further research and further investigationwere unnecessary, and consequently stopped—forthose who believed in this theory. It is one of the great vicesof the quantity theory of money that it tends to check investigationfor underlying factors in a business situation.Anderson concludes:The quantity theory of money is invalid. . . . We cannot accepta predominantly monetary general theory either for the levelof commodity prices or for the movements of the businesscycle. (Anderson, Economics and the Public Welfare, pp. 70–71)26 The Spanish monetarist Pedro Schwartz once stated: