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

A Critique of Monetarist and Keynesian Theories 577His economics is pure macroeconomics, with the nationalgovernment as the one unit, the one dynamic force, controllingthe economy through the money supply. Friedman’seconomics are completely demand-focused. Money andcredit are the pervasive, and indeed the only, economic reality.That Friedman sees money supply as original and interestrates as derivative, is not much more than minor gloss onthe Keynesian scriptures. 95Furthermore even before the appearance of Keynes’s TheGeneral Theory, the principal monetarist theorists of theA good overview of the trends in diffuse modern macroeconomicsappears in Olivier J. Blanchard and Stanley Fischer, Lectures on Macroeconomics(Cambridge, Mass.: The MIT Press, 1990); see also DavidRomer, Advanced Macroeconomics (New York: McGraw-Hill, 1996).95 Peter F. Drucker, “Toward the Next Economics,” published in The Crisisin Economic Theory, Daniel Bell and Irving Kristol, eds. (New York:Basic Books, 1981), p. 9. Therefore, as Mark Skousen points out, it is notsurprising that one of the most prominent monetarists of the 1930s,Ralph G. Hawtrey, allied himself with Keynes against Hayek, defendingan anti-saving position and adopting viewpoints very similar to thoseof Keynesians with respect to capital theory and macroeconomics (see,among other sources, Hawtrey’s Capital and Employment, pp. 270–86,and Skousen’s Capital and its Structure, p. 263). The entire “consumptionfunction” debate again reveals the obvious Keynesian and macroeconomicinfluence on monetarists. In fact Milton Friedman, while preservingall of the Keynesian analytical and theoretical tools, attemptedwith his “permanent-income hypothesis” to introduce an empiricalvariant which would make it possible to modify the conclusions reachedthrough macroeconomic analysis. Indeed if economic agents plan theirconsumption in view of long-term permanent income, then according toKeynesian logic, more-than-proportional increases in saving will notaccompany rises in income, and therefore the underconsumption issuesKeynes analyzed will disappear. Nonetheless the use of this type of“empirical argument” suggests implicit acknowledgement of the validityof Keynesian hypotheses regarding the harmful effects of saving andthe capitalist tendency toward underconsumption. Nevertheless wehave already exposed the analytical errors of such a viewpoint, and wehave based our reasoning on the microeconomic arguments whichexplain that certain market forces lead to the investment of savedamounts, regardless of the apparent historical form of the supposedconsumption function. See Milton Friedman, A Theory of the ConsumptionFunction (Princeton, N.J.: Princeton University Press, 1957).