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

A Critique of Monetarist and Keynesian Theories 563Hence we must concur with Hayek’s statement that thedoctrines of John Maynard Keynes take usback to the pre-scientific stage of economics, when the wholeworking of the price mechanism was not yet understood, andonly the problems of the impact of a varying money streamon a supply of goods and services with given prices arousedinterest. 78that the interest rate is determined by the demand for money or liquiditypreference, and then he states that the latter in turn depends on theformer.) Another considerable shortcoming of Keynesian doctrine is theassumption that economic agents first decide how much to consumeand then, from the amount they have decided to save, they determinewhat portion they will use to increase their cash balances and then whatportion they will invest. Nevertheless economic agents simultaneouslydecide how much they will allot to all three possibilities: consumption,investment and the increase of cash balances. Hence if there is a rise inthe amount of money each economic agent hoards, the additionalamount could come from any of the following: (a) funds previously allocatedfor consumption; (b) funds previously allocated for investment; or(c) any combination of the above. It is obvious that in case (a) the interestrate will fall; in case (b) it will rise; and in case (c) it may remain constant.Therefore no direct relationship exists between liquidity preferenceor demand for money and the interest rate. An increase in thedemand for money may not affect the interest rate, if the relationshipbetween the value allotted for present goods and that allotted for futuregoods (time preference) does not vary. See Rothbard, Man, Economy, andState, p. 690. A list of all relevant critical references on Keynesian theory,including various articles on its different aspects, appears in Dissent onKeynes: A Critical Appraisal of Keynesian Economics, Mark Skousen, ed.(New York and London: Praeger, 1992). See also the previously citedchapters 7–9 of Garrison’s Time and Money.78 Hayek, The Pure Theory of Capital, pp. 409–10. Hayek concludes:It is not surprising that Mr. Keynes finds his views anticipatedby the mercantilist writers and gifted amateurs: concern withthe surface phenomena has always marked the first stage of thescientific approach to our subject. But it is alarming to see thatafter we have once gone through the process of developing asystematic account of those forces which in the long run determineprices and production, we are now called upon to scrapit, in order to replace it by the short-sighted philosophy of thebusiness man raised to the dignity of a science. Are we not even