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

564 Money, Bank Credit, and Economic CyclesIn fact Keynesian remedies which consist of increasingeffective demand and credit expansion do not begin to relieveunemployment. Instead they inevitably worsen it, as theyresult in a poor allocation of jobs and factors of productionthroughout a series of productive stages which consumers donot wish to maintain. 79told that, “since in the long run we are all dead,” policy shouldbe guided entirely by short-run considerations? I fear that thesebelievers in the principle of après nous le déluge may get whatthey have bargained for sooner than they wish. (p. 410)79 Hayek’s main objection to macroeconomics (both Keynesian andmonetarist versions) is that macroeconomists work with macroaggregatesand thus do not take into account the harmful microeconomiceffects of credit expansion, which as we have seen, leads to the malinvestmentof resources and ultimately, to crisis and unemployment.Moreover, as Keynesians assume excess availability of all factors exists(due to idle capacity and unemployment of resources), they tend to ignorethe price system, the functioning of which they consider unnecessary. The pricesystem is therefore rendered a vague, incomprehensible redundancy. To theextent that all is determined by macroaggregate functions, the traditionalmicroeconomic theory of relative-price determination and thetheory of capital, interest and distribution, which are the backbone ofeconomic theory, become unintelligible. Unfortunately, as Hayek pointsout, an entire generation of economists have learned nothing other thanKeynesian [and monetarist] macroeconomics (“I fear the theory willstill give us a lot of trouble: it has left us with a lost generation of economistswho have learnt nothing else,” F.A. Hayek, “The Campaignagainst Keynesian Inflation,” in New Studies, p. 221). Hayek believesKeynes was aware he had developed a weak theoretical framework.Hayek indicates that the last time he saw Keynes prior to his death, heasked him if he was becoming alarmed at the poor use most of his discipleswere making of his theories:His reply was that these theories had been greatly needed inthe 1930s; but if these theories should ever become harmful, Icould be assured that he would quickly bring about a changein public opinion. (Hayek, “Personal Recollections of Keynesand the Keynesian Revolution,” p. 287)Hayek states that Keynes died two weeks later without ever having thechance to alter the course of events. Hayek criticizes him for giving thename “general theory” to an erroneous conceptual framework which, asits own author eventually recognized, had been conceived ad hoc based