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

A Critique of Monetarist and Keynesian Theories 535the purchasing power of money, this action would trigger andintensify all of the processes which inexorably lead to investmenterrors and crisis, and which monetarists are incapable ofunderstanding, due to the obvious deficiencies in the macroeconomicanalytical tools they use. 38A BRIEF NOTEONTHETHEORY OF RATIONAL EXPECTATIONSThe analysis carried out here can also be applied to makesome comments on both the hypothesis of rational expectationsand other contributions of new classical economics.According to the hypothesis of rational expectations, economicagents tend to make correct predictions based on anappropriate use of all relevant information and on scientificknowledge made available by economic theory. Those whoaccept this hypothesis argue that government attempts toinfluence production and employment through monetary andfiscal policy are fruitless. Supporters therefore hold that, to theextent that economic agents foresee the consequences of traditionalpolicies, these policies are ineffective in influencing realproduction or employment. 39Nevertheless there are serious flaws in the economic logicof these analytical developments in new classical economics.On the one hand, we must take into account that economicagents cannot possibly obtain all of the relevant information,both with respect to the particular circumstances of the currentcycle (practical knowledge), and with respect to whicheconomic theory best explains the course of events (scientificknowledge). This is due, among other factors, to a lack ofunanimity as to which theory of cycles is the most valid:though the arguments presented here indicate that the correctexplanation is the one provided by the Austrian theory of thebusiness cycle, as long as the scientific community as a wholefails to accept it, we cannot expect all other economic agents38 See section 9 of chapter 6 (pp. 424–31), which covered the harmfuleffects of policies to stabilize the purchasing power of money.39 See the explanation on the evolution of the school of rational expectationsin Garrison, Time and Money, chap. 2, pp. 15–30.