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

A Critique of Monetarist and Keynesian Theories 553KEYNESIAN ANALYSIS AS A PARTICULAR THEORYAs Austrian economists in general and Mises in particulardemonstrated as early as 1928, in the specific event that idleresources and unemployment are widespread, entrepreneurs,relying on new loans, may continue to lengthen the productivestructure without provoking the familiar reversion effects,until the moment one of the complementary factors in the productionprocess becomes scarce. 66 At the very least, this factshows Keynes’s so-called general theory to be, in the best case,a particular theory, applicable only when the economy is in thedeepest stages of a depression with generalized idle capacityin all sectors. 67 However, as we saw in the last chapter, evenunder these conditions credit expansion will stimulate a widespreadmalinvestment of resources. This malinvestment willadd to previous errors not yet liquidated owing to the institutionalrigidity of the labor market and of the other productiveresources. If holders of the new jobs created in these stages ofacute depression begin to spend their earnings on consumergoods and services at a pace more rapid than that at whichfinal consumer goods are arriving on the market (due to a relativeshortage of some factor or to bottlenecks related to anyof the complementary factors or resources of production), thefamiliar microeconomic processes which tend to reverse theinitial expansionary effects of new bank-credit will be triggered.Under such conditions, it will be possible to create newjobs only if real wages fall, a phenomenon we observe when[T]he essential thing . . . is that we must always compare theresult of investment embodied in concrete goods with themoney expenditure on these goods. It is never the investmentwhich is going on at the same time as the saving, butthe result of past investment, that determines the supply ofcapital goods to which the monetary demand may or maynot correspond.66 Mises, On the Manipulation of Money and Credit, p. 125 (p. 49 of Geldwertstabilisierungund Konjunkturpolitik, the German edition).67 For Roger Garrison, the true general theory is that of the Austriansand “Keynesian theory [we would also say monetarist theory] becomesa special case of Austrian theory.” See Garrison, Time and Money, p. 250.