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

562 Money, Bank Credit, and Economic Cyclesfurther complicates the process by which the productive structurereadjusts, and it worsens the outlook for the stages furthestfrom consumption. As a result of Keynesian “remedies,”entrepreneurs will surely encounter even greater difficulty inconsistently financing these stages using voluntary savings.As to the likelihood that Keynesian policies could cure “secular”unemployment through the complete socialization ofinvestment, the Austrian theorem on the impossibility of economiccalculation under socialism is entirely applicable, asillustrated by the massive industrial malinvestment accumulatedduring the decades of government-directed investmentsin the former socialist economies of Eastern Europe.Short-term unemployment can only be eliminatedthrough “active” policies if workers and unions let themselvesbe deceived by the money illusion, and thus maintain nominalsalaries constant in an inflationary atmosphere of soaring consumerprices. Experience has shown that the Keynesian remedyfor unemployment (the reduction of real wages throughincreases in the general price level) has failed: workers havelearned to demand raises which at least compensate them fordecreases in the purchasing power of their money. Thereforethe expansion of credit and effective demand, an action Keynesianssupported, has gradually ceased to be a useful tool forgenerating employment. It has also entailed a cost: increasinglygrave distortions of the productive structure. In fact a stage ofdeep depression combined with high inflation (stagflation)followed the crisis of the late seventies and was the empiricalepisode which most contributed to the invalidation of all Keynesiantheory. 7777 This is not the appropriate place to carry out an exhaustive analysis ofthe rest of the Keynesian theoretical framework, for instance his conceptionof the interest rate as a strictly monetary phenomenon determinedby the money supply and “liquidity preference.” Nonethelesswe know that the supply of and demand for money determine itsprice or purchasing power, not the interest rate, as Keynes maintains,concentrating merely on the effects credit expansion exerts on the creditmarket in the immediate short term. (Besides, with his liquidity preferencetheory, Keynes resorts to the circular reasoning characteristic of thefunctional analysis of mathematician-economists. Indeed first he asserts