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

572 Money, Bank Credit, and Economic CyclesThe Marxist theorist Mijail Ivanovich Tugan-Baranovskylater expanded on and reworked Engels’s comments with theaim of developing a theory of economic cycles based on thephenomenon of “overproduction” in the stages of investment.As we have already indicated, this theory is very closelyrelated to the Austrian theory of economic cycles presentedhere. Indeed though Tugan-Baranovsky is unable to identifythe monetary origin (credit expansion) of overinvestment anddisequilibrium between the different stages in the productionprocess, his interpretation is basically correct with respect tocapital theory, and Hayek himself has recognized it as anantecedent to the Austrian theory of economic cycles. 87Therefore it is not surprising that an author such asHoward J. Sherman, of clear Marxist leanings, has maintainedthat Hayek’s theory on the different stages in the productionprocess fits in perfectly with the Marxist theoretical framework.This framework has traditionally highlighted a tendencytoward a significant disproportion between the differentindustrial stages in the capitalist system. As one mightexpect, the purpose has not been to demonstrate the harmfuleffects credit expansion and government and central banks’monetary policy exert on the productive structure, but merelyto illustrate the supposed inherent instability in the capitalistsystem. 88 According to the Austrian School, Marxists’ errorlies not in their diagnosis of the symptoms of the disease (basicallyaccurate), but in their analysis of its causes, which Austrianssee in the credit expansion which derives from the violationof legal principles in the monetary bank-depositcontract (fractional-reserve cash ratio).In addition, the neo-Ricardian and neoclassical controversyregarding the possibility of technique reswitching alsohas favorable implications for the Austrian theory of economiccycles. Indeed the reswitching debate has emphasized87 Hayek’s explicit reference to Tugan-Baranovsky appears in Prices andProduction, p. 103, and also in The Pure Theory of Capital, p. 426. See alsochapter 6, footnote 71.88 See Howard J. Sherman’s book, Introduction to the Economics of Growth,Unemployment and Inflation (New York: Appleton, 1964), esp. p. 95.