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

A Critique of Monetarist and Keynesian Theories 545upon which the classical analysis rests. Nonetheless Keynesoverlooked the fact that the analysis carried out by AustrianSchool theorists (Mises and Hayek) had already revealed thatprocesses of credit and monetary expansion ultimately distortthe productive structure and create a situation in which thesupply of capital goods and consumer goods and services nolonger corresponds with economic agents’ demand for them.In other words a temporal maladjustment in the economic systemresults. 53 In fact the entire Austrian theory of the economiccycle merely explains why, under certain circumstances,and as a consequence of credit expansion, Say’s lawrepeatedly fails to hold true. The theory also accounts for thespontaneous reversion effects which, in the form of a crisisand the necessary recession or readjustment of the productivesystem, tend to cause the system to again become coordinated.Thus upon receiving from Keynes a copy of The General Theory,Hayek responded that althoughI fully agree about the importance of the problem which yououtline at the beginning, I cannot agree that it has alwaysbeen as completely neglected as you suggest. 54When members of the Austrian School developed the theoryof capital, they shed light for the first time on the maladjustmentprocess the productive structure often goes through.Hence the Austrians were the first to identify the microeconomicprocesses by which an increase in saving manifests itselfin a lengthening and widening of the productive structure of53 Say’s law is violated in the short run by a fiat credit inflation.Of course, the short run may take some time to work itselfout! True, the larger supply created by the fiat money also createsits own excessive demand, but it is the wrong kind ofdemand in the case of a business credit expansion, anephemeral demand which cannot last. (Skousen, The Structureof Production, p. 325)54 Letter from F.A. Hayek to John Maynard Keynes, dated February 2,1936 and printed on p. 207 of vol. 29 of The Collected Writings of JohnMaynard Keynes: The General Theory and After: A Supplement (London:Macmillan, 1979), p. 207.