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

A Critique of Monetarist and Keynesian Theories 561goods or in capital goods, but whether to invest in productionprocesses which will yield consumer goods in the near future or inthose which will yield them in a more distant future. Thus Keynes’snotion of a productive structure comprised of only two stages(one of consumer goods and another of capital goods) and hisfailure to allow for the temporal aspect of the latter, nor for theconsecutive stages which compose it, lead him into the trap ofthe “paradox of thrift,” the fallacious theoretical rationalewhich we explained in chapter 5. 76Hence Keynesians hold no theory to explain why crisesrecur in a hampered market economy that suffers creditexpansion (that is, one in which traditional legal principles areviolated). Keynesians simply attribute crises to sudden halts ininvestment demand, interruptions caused by irrational behavioron the part of entrepreneurs or by an unexpected loss ofconfidence and optimism on the part of economic agents.Moreover Keynesians neglect to recognize in their analysesthat crises are an endogenous consequence of the very creditexpansion process which first feeds the boom. Unlike their fellowmacroeconomists, the monetarists, Keynesians believe theresults of monetary expansion policies to be relatively lesseffective and important than those of fiscal policy, and theyadvocate public spending as the means to directly increaseeffective demand. They fail to comprehend that such a policy76 It is important to remember that John Maynard Keynes himself explicitlyand publicly admitted to Hayek that he lacked an adequate theoryof capital. In Keynes’s own words:Dr. Hayek complains that I do not myself propound any satisfactorytheory of capital and interest and that I do not buildon any existing theory. He means by this, I take it, the theoryof capital accumulation relatively to the rate of consumptionand the factors which determine the natural rate of interest.This is quite true; and I agree with Dr. Hayek that a developmentof this theory would be highly relevant to my treatmentof monetary matters and likely to throw light into dark corners.(John Maynard Keynes, “The Pure Theory of Money: AReply to Dr. Hayek,” Economica 11, no. 34 [November 1931]:394; p. 56 in the Wood and Woods edition)