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

528 Money, Bank Credit, and Economic CyclesFurthermore not only are monetarists incapable ofexplaining economic recessions except by resorting to theeffects of the monetary contraction; 27 they have also beenunable to present any valid theoretical argument against theAustrian theory of economic cycles: they have simply ignoredit or, as Friedman has done, have only mentioned it in passing,falsely indicating that it lacks an “empirical” basis. ThusDavid Laidler, in a recent critique of the Austrian theory of thecycle, had no choice but to turn to the old, worn-out Keynesianarguments which center on the supposedly healthyinfluence of effective demand on real income. The basic ideais this: that an increase in effective demand could ultimatelygive rise to an increase in income, and hence, supposedly, insavings, and that therefore the artificial lengthening basedon credit expansion could be maintained indefinitely, andthe process of poor allocation of resources would not necessarilyreverse in the form of a recession. 28 The essential errorThere is no proven theory of cycles: it is a phenomenon wesimply do not understand. However with money becomingelastic and expansions and recessions leaving us speechless, itis easy to see how we macroeconomists became unpopular.(Pedro Schwartz, “Macro y Micro,” Cinco Días [April 12,1993], p. 3)It is regrettable that the effects of credit “elasticity” on the real economycontinue to befuddle monetarists, and that they still insist on disregardingthe Austrian theory of economic cycles, which not only fully integratesthe “micro” and “macro” aspects of economics, but also explainshow credit expansion, a product of fractional-reserve banking, invariablyprovokes a widespread poor allocation of resources in microeconomicterms, a situation which inevitably leads to a macroeconomicrecession.27 See, for instance, Leland Yeager, The Fluttering Veil: Essays on MonetaryDisequilibrium, George Selgin, ed. (Indianapolis, Ind.: Liberty Fund,1997).28 It is now a commonplace that, if saving depends upon realincome, and if the latter is free to vary, then variations in therate of investment induced by credit creation, among otherfactors, will bring about changes in the level of real incomeand therefore the rate of voluntary saving as an integral partof the mechanisms that re-equilibrate intertemporal choices.