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

A Critique of Monetarist and Keynesian Theories 539In addition rational expectations theorists still do not comprehendthe Austrian theory of the cycle, and, like monetarists,they lack an adequate capital theory. In particular they fail to seehow credit expansion affects the productive structure and why arecession inevitably results, even when expectations regardingthe general course of events are flawless. After all, if entrepreneursthink they possess more (subjective) information than all othereconomic agents and believe themselves capable of withdrawingfrom an expansionary process before they sustain any losses, itwould go against the grain for them to dismiss the possibility ofmaking short-term gains in a market where such a process hadbeen initiated. In other words, no one is going to turn his nose upat created money just because it will ultimately usher in a recession.One does not look a gift horse in the mouth, especially if oneplans to get rid of the horse before the catastrophe hits.The role of expectations in the cycle is much more subtlethan new classical economists assert, as Mises and Hayekreveal in their treatment of the Austrian theory of the cycle,covered in chapter 6. Indeed Mises explains that there is oftena certain time lag between the beginning of credit expansionbasis as to actually nullify the process that would have led tothe crisis. The idea that entrepreneurs know enough abouttheir respective positions to hedge against the central bank issimply not plausible. It all but denies the existence of an economicproblem that requires for its solution a market process.(Roger W. Garrison, “What About Expectations?: A Challengeto Austrian Theory,” an article presented at the 2nd AustrianScholars Conference [Mises Institute, Auburn, Alabama,April 4–5, 1997, manuscript pending publication], p. 21; seealso Time and Money, pp. 15–30)Our stance on the theory of rational expectations is, however, even moreradical than that of O’Driscoll and Rizzo. As we have already stated,even if economic agents know not only the typical shape of the cycle,but also the specific moments and values at which the most importantchanges are to come about, they will still be inclined to accept thenewly-created money to cash in on the myriad of opportunities forprofit which crop up throughout the capital goods structure as the marketprocess advances through the different stages in the cycle. See anillustration of this strategy in Peter Temin and Hans-Joachim Voth, “Ridingthe South Sea Bubble,” American Economic Review 94, no. 5 (December2004): 1654–68, esp. p. 1666.