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

A Critique of Monetarist and Keynesian Theories 555THE SO-CALLED MARGINAL EFFICIENCY OF CAPITALWe find another indication that Keynes’s is a specific theory,rather than a general one, in his definition of the “marginalefficiency of capital,” which he expresses asthat rate of discount which would make the present value ofthe series of annuities given by the returns expected fromthe capital-asset during its life just equal to its supplyprice. 69The most important error Keynes commits is to considerinvestment determined by the “marginal efficiency of capital” asdefined above, viewing the supply price of the capital good as a given,an unchanging, constant amount, even when its expected returnvaries. Indeed Keynes, succumbing to the classical “objectivist”tradition passed down by Marshall, believes the supply price ofcapital goods does not fluctuate when their return outlookimproves or worsens. This belief is based on the implicit notionthat such prices are ultimately determined by the historical costof producing the capital good. Thus Keynes clings to a remnantof the old objective theory of value, according to which value isdetermined by cost. This doctrine, clearly on the decline in relationto the Austrian subjectivist conception, was partiallyinflexibility that hinders it today. On this topic see Hans-HermannHoppe’s article, “Theory of Employment, Money, Interest and the CapitalistProcess: The Misesian Case Against Keynes,” chapter 5 in The Economicsof Ethics and Private Property (London: Kluwer Academic Publishers,1993), pp. 111–38, esp. pp. 124–26.Similarly, in the banking sector, as Jörg Guido Hülsmann has written,[t]he public no longer perceives business cycles and breakdownof the entire banking system as upshots of the fractional-reserveprinciple run amok under the protection of thelaw, but as a “macroeconomic” problem requiring action bythe central-bank managers.See his article, “Has Fractional-Reserve Banking Really Passed the MarketTest?” p. 416.69 Keynes, The General Theory, p. 135.