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

A Critique of Monetarist and Keynesian Theories 557productive structure, a theory we covered in chapter 5. In factwe know that the interest rate is the price of present goods interms of future goods, and that it tends to manifest itselfthroughout the productive structure in the accounting profitdifferential which arises between the different stages in theproduction process. To put it another way, the interest rateexpresses itself in the difference between income and costs ateach stage, and there is always an inexorable tendency for theprofits at each stage to match the interest rate (that is, for thecost of production at each stage to equal the present value ofthe stage’s marginal productivity).KEYNES’S CRITICISM OF MISES AND HAYEKIn light of the above, the explicit criticism Keynes levelsagainst Mises and Hayek on pages 192 and 193 of The GeneralTheory is absurd. Keynes accuses Mises and Hayek of confusingthe interest rate with the marginal efficiency of capital. Aswe know, the Austrians believe that the interest rate is determinedindependently by the value scales of time preference(the supply and demand of present goods in exchange forfuture goods), and that the marginal productivity or efficiencyof capital merely affects the present value of capital goods. Inthe market, the price (cost) of a capital good tends to equal thevalue (discounted by the interest rate) of its future flow ofrents, or the series of values corresponding to the marginalproductivity of the capital equipment. The Austrians thereforeconsider that the marginal productivity of capital tends to followthe interest rate and not vice versa, and that only in equilibrium(which is never reached in real life) do the two becomeequal. Keynes’s fundamental error lies in his failure to realizethat the purchase price of capital goods will vary when expectationsof the return or productivity associated with themimprove. This is how events unfold in real life, and Austrianeconomists have always taken this fact into account in theiranalysis. Hence when Keynes boldly claims Austrian economists“confuse” the interest rate with the marginal productivityof capital, he scandalously twists the facts. 7272 Denis H. Robertson, among others, agrees. When critically analyzingThe General Theory, Robertson wrote the following directly to Keynes: