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

A Critique of Monetarist and Keynesian Theories 573the heterogeneous, complementary nature of different capitalgoods (in the purest Austrian tradition), versus the neoclassicalconception of capital as a homogeneous fund. FurthermoreAustrians, and Hayek in particular, showed from the beginningthat the lengthening of the productive structure couldoften provoke seemingly paradoxical instances of reswitchingwhich nevertheless, when interpreted prospectively, are simplyanother manifestation of the normal lengtheningprocess. 89The jump between two alternate production techniques, anoccurrence which may accompany continuous variations inthe interest rate, and which has quite dismayed neoclassicaltheorists, presents no difficulties whatsoever for the Austriantheory of capital. In fact an increase in saving, and thus adecrease in the interest rate, always manifests itself in a changein the temporal perspective of consumers, who begin to viewtheir actions in terms of a more distant future. Hence the productivestructure is lengthened regardless of whether changesor even reswitching occur with respect to the different specificproduction techniques. In other words, within the AustrianSchool model, if, at a drop in the interest rate, a formertechnique is revived in connection with a new investment89 It is evident and has usually been taken for granted thatmethods of production which were made profitable by a fallof the rate of interest from 7 to 5 per cent may be madeunprofitable by a further fall from 5 per cent to 3 per cent,because the former method will no longer be able to competewith what has now become the cheaper method. . . . It is onlyvia price changes that we can explain why a method of productionwhich was profitable when the rate of interest was 5per cent should become unprofitable when it falls to 3 percent. Similarly, it is only in terms of price changes that wecan adequately explain why a change in the rate of interestwill make methods of production profitable which were previouslyunprofitable. (Hayek, The Pure Theory of Capital, pp.388–89 [also pp. 76–77, 140ff., 191ff., and 200])Augusto Graziani, for his part, asserts that Hayek “had shown the possibilityof reswitching.” See Graziani’s “Book review of Hayek on Hayek:An Autobiographical Dialogue,” in The European Journal of the History ofEconomic Thought 2, no. 1 (Spring, 1995): 232.