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

580 Money, Bank Credit, and Economic Cyclessee a direct, immediate and effective connection betweenmoney and real events. In contrast Keynesians base theiranalysis on the short term and are very skeptical about a possibleconnection between money and real events, a link capableof somehow guaranteeing equilibrium will be reached andsustained. In comparison, the Austrian analysis presentedhere and the elaborate capital theory on which it rests suggesta healthy middle ground between monetarist and Keynesianextremes. In fact for Austrians, monetary assaults (creditexpansion) account for the system’s endogenous tendency tomove away from “equilibrium” toward an unsustainablepath. In other words they explain why the capital supplystructure tends to be incompatible with economic agents’demand for consumer goods and services (and thus Say’s lawtemporarily fails to hold true). Nonetheless certain inexorable,microeconomic forces, driven by entrepreneurship, the desirefor profit, and variations in relative prices, tend to reverse theunbalancing effects of expansionary processes and returncoordination to the economy. Therefore Austrians see a certainconnection—a loose joint, to use Hayek’s terminology 100 —between monetary phenomena and real phenomena, a linkwhich is neither absolute, as monetarists claim, nor totallynon-existent, as Keynesians assert. 101do justice to the alternative Austrian approach, which he hardly mentionsat all.100 Hayek, The Pure Theory of Capital, p. 408.101 The conception of money as a loose joint suggests that thereare two extreme theoretical constructs to be avoided. Tointroduce money as a “tight joint” would be to deny the specialproblem of intertemporal coordination. . . . At the otherextreme, to introduce money as a “broken joint” would be todeny even the possibility of a market solution to the problemof intertemporal coordination. . . . Monetarism and Keynesianism,have tended to adopt one of the two polar positionswith the result that, as a first approximation, macroeconomicproblems are seen to be either trivial or insoluble. Betweenthese extreme conceptions is Hayek’s notion of loose-jointedmoney, which serves to recognize the problem while leavingthe possibility of a market solution to it an open question.