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

A Critique of Monetarist and Keynesian Theories 559no sense at all of these schools of thought.” 73 Keynes’s lack ofan adequate theory of capital also explains his development ofa mechanistic conception of the investment multiplier, whichhe defines as the reciprocal of one minus the marginal propensityto consume. Thus according to Keynes, the greater themarginal propensity to consume, the more an increase ininvestment will boost the national income. However theinvestment multiplier hinges on a purely mathematical argumentwhich contradicts the most basic economic logic of capitaltheory. Indeed the multiplier indicates that any increase incredit expansion will cause a rise in real national income equalto the reciprocal of the marginal propensity to save (oneminus the marginal propensity to consume). Hence accordingto Keynesian logic, the less people save, the more real incomewill grow. Nevertheless we know that the mathematicalautomatism which lies at the root of the multiplier conceptbears no relation to the real processes at work in the productivestructure. Credit expansion will stimulate investment thatwill drive up the price of the factors of production and bringabout a subsequent, more-than-proportional increase in theprice of consumer goods and services. Even if gross income inmoney terms rises as a result of the injection of new moneycreated by the banking system, the multiplier, owing to itsmechanical and macroeconomic nature, is inadequate to depictthe disruptive microeconomic effects credit expansion always exerts onthe productive structure. Consequently the multiplier masks thewidespread malinvestment of resources which in the long runimpoverishes society as a whole (rather than enriching it, asKeynes alleges). We agree with Gottfried Haberler when heconcludes that the multiplierturns out to be not an empirical statement which tells ussomething about the real world, but a purely analyticalstatement about the consistent use of an arbitrarily chosenterminology—a statement which does not explain anythingabout reality. . . . Mr. Keynes’ central theoretical idea about73 Keynes, The General Theory, p. 329. Monetarist writers such asHawtrey, Friedman, and Meltzer have made the same explicit acknowledgement.