Austrian Macroeconomics

Review of Time and Money (London/New York: Routledge, 2000) 272pp..

In the 1930s, there appeared several book-length surveys of contemporary monetary and business cycle theory.  In each one of these Friedrich A. Hayek’s version of the Austrian theory of money, capital and the business cycle was given central prominence, along with the competing theories of John Maynard Keynes, Dennis Robertson and Ralph Hawtrey.  The authors of these surveys considered Hayek to have made valuable contributions to the understanding of the relationships between money, interest rates, the structure of production and economic fluctuations. 

As one example, in 1934 Alec L. Macfie said that the state of monetary theory in Great Britain had been greatly advanced due to Hayek moving to the London School of Economics: “British economic science owes these direct contributions to the happy insight which has brought Dr. Hayek to London.  Our science has been enriched by this graft on to its main stem of the historic and acutely virile Austrian analysis.  Trade-cycle theory has especially benefited.” And he concluded, in part, that, “There can be no doubt that Dr. Hayek digs to the roots of the real causes of expansions and slumps.”i

When Keynes published his General Theory of Employment, Interest and Money in 1936, one reviewer, Benjamin Haggott Beckhart of Columbia University, defended the Austrians saying that Keynes failed to “meet the contention that manipulations of the monetary rate of interest and their accompaniment of forced savings through a boom will being about distortions in the structure of production of such a character that a crisis will be induced.”  Beckhart concluded that, “Apparently [Keynes] fails to see the importance of this aspect of the Bohm-Bawerk-Wicksell-Mises-Hayek theory of capital in relation to his own doctrines.”ii

And as late as 1942, George N. Halm integrated Hayek’s analysis of monetary non-neutrality and the problems with price level stabilization, the Austrian theory of “waiting and the period of production,” and the Mises-Hayek monetary malinvestment theory of the trade cycle throughout his textbook on Monetary Theory.iii

But after the Second World War interest in the Austrian theory of capital, money and the business cycle all but disappeared from the economics profession due to the near monopoly position that Keynesian Economics came to have.  And Hayek’s role and significance in the monetary and business cycle debates of the 1930s were virtually forgotten.  In 1933, for instance, George Shackle had published his first article, while still a graduate student at the LSE, on the contrast between Hayek and Keynes’ theory of money and the trade cycle.iv But by the time Shackle published his book on The Years of High Theory: Invention and Economic Tradition, 1926-1939 in 1967, Hayek was referred to simply as the editor of a 1933 German-language volume that had contained an early version of Gunnar Myrdal’s Monetary Equilibrium.v

Many writers have pointed to Sir John Hick’s 1967 essay, “The Hayek Story,” as the beginning of the reawakened interest in Hayek and his contributions to Austrian Economics within the economics profession.vi   Also, in 1972, the Institute of Economic Affairs in London, published a volume of excerpts from Hayek’s writings on money, the business cycle, Keynesian economics and monetary policy, that had been carefully and intelligently selected and edited by Sudha R. Shenoy.vii But without a doubt the catalyst for Hayek’s ideas to be, once again, taken seriously was the awarding of the Nobel Prize in Economics in 1974.  And not long after Hayek received the award, Gerald P. O’Driscoll published the first book-length, and highly readable, summary of Hayek’s contributions to monetary and business cycle theory, thus making Hayek’s ideas once more easily accessible to the modern reader.viii

Since that time a number of Austrian Economists have been attempting to seriously reinvigorate Austrian monetary, capital and business cycle theory, building upon Hayek’s writings from the 1930s and 1940s.  One of the first detailed and serious contributions along these lines was Mark Skousen’s The Structure of Production.  He summarized the development of Austrian capital theory as well as the criticisms made of it over the decades, and then offered a refined reformulation of the Hayekian approach.ix   Furthermore, Skousen then popularized his restatement of the Austrian theory of the capital structure by including it in his book, Economics on Trial: Lies, Myths and Realities, which was meant to serve as a convenient “Austrian” supplementary text to a principles of economics course.x

But the economist who has been most persistently attempting to reformulate Austrian capital and business cycle theory, while at the same time critiquing mainstream monetary and macroeconomics, for over twenty years has been Roger W. Garrison.  He has been recognized as a creative and original thinker ever since his 1976 essay, “Austrian Macroeconomics: A Diagrammatical Exposition,” in which he used three-dimensional diagrams to contrast the standard Keynesian and Austrian frameworks.xi   In dozens of articles, many published in mainstream economics journals, he has slowly been developing his version of, especially, Hayek’s Austrian theory of capital and the business cycle.

Finally, his efforts have been brought together in a single, systematic volume now recently published under the title, Time and Money: The Macroeconomics of Capital Structure.  Reading his book makes the reader realize just how much time has been lost due to the triumph and domination of Keynesian Economics for the forty years following the publication of The General Theory.  Even over the last quarter century during which Keynesian Economics was put on the defensive and then into retreat in the face of, first, Monetarism, and then, New Classical and Rational Expectations theory, all of the, now, competing Macroeconomic models have continued to be constructed under highly simplified assumptions and usually in highly aggregative terms.

As David Simpson pointed out in 1994, in evaluating the more recent mainstream macroeconomic frameworks growing out of Monetarism and Rational Expectations theory:

The macroeconomic version of the quantity theory distracts from the need to analyze the transmission mechanism through which an increase in the quantity of money influences the relative demand for different goods and services, and hence the set of relative prices as well as the aggregate price level.  By considering only the effects of changes in the quantity of money on the aggregate price level, attention is diverted from the misdirection of resources caused by inflation, and thus from the origins of unemployment which eventually results, as inflation subsides.xii

Presenting just such a needed disaggregated “Austrian” macroeconomics is precisely what Garrison sets out to achieve in Time and Money.  He is, in a sense, attempting to pick up where the Austrians left off in their contributions of the 1930s, and at the same time reinterpret what has happened in Macroeconomics since then.  He does so by offering a “capital-based” theory of macroeconomic relationships that focuses on the patterns of demand and relative prices in the structure of production, and contrasting it with his view of standard macroeconomics as a “labor-based” theory of aggregate relationships.

Central to Garrison’s distinction between these two macroeconomic approaches is his emphasis on the fact that standard macroeconomic theory lacks a theory of a capital structure.  Capital, in the standard framework, is viewed as a homogeneous (and in the short-run, fixed) quantity.  No doubt it is comprised of various types of machinery, equipment and tools with which labor does its work to produce output of consumer goods, but it is primarily viewed as a general quantity of physical capital, to which varying amounts of equally homogeneous labor is set to work to produce varying total amounts of output in general.  Furthermore, the uses for which this capital is applied do not possess any particular time sequence or order.  There are merely aggregate quantities of input (capital and labor) employed, and aggregate quantities of output (goods and services in general) produced.  

Garrison develops his critique of this standard Keynesian macroeconomic model over three length chapters, the details of which cannot be fully summarized here.  But in essence, Garrison highlights the fact that in the model the leading, if not almost single question, is, what determines the quantity of labor employed, and the resulting total output forthcoming?  Neither the patterns of employment nor the composition of output is considered important or essential to the analysis.  The central, relevant relationship is: the real wage at which labor would be fully employed and the level of aggregate demand sufficient to make it profitable to employ all those desiring to work at that real wage.  Utilizing a six-quadrant diagram, Garrison traces out the various reasons why in the traditional Keynesian theory the likelihood of a free market economy continuously sustaining a level of full employment is low.  His presentation of the assumptions underlying the theory makes it clear how unrealistic and tortured the Keynesian approach really is. 

Garrison also argues that the Monetarist story is merely the Keynesian theory with a different ending.  Whereas the traditional Keynesians believed that activist fiscal and monetary policy could permanently change the level of employment, Milton Friedman and the Monetarists countered that at most the effects from monetary and fiscal stimuli would be temporary.  The general framework used by both Keynesians and Monetarists is basically the same.  But what Garrison wishes to emphasize is that, like the Keynesians, the Monetarists also place little or no importance concerning any patterned effects that changes in the quantity of money may have on the direction of demand and the relative allocation of resources among competing uses in the economy.  And Friedman’s frequently used example of “helicopter money,” in which increases in the money supply are randomly dropped from the sky with a resulting general upward trend in prices, typifies a lack of interest in the distributional effects resulting from changes in the money supply.  In fact, Garrison concludes that precisely because the Monetarist approach downplays any concern with how increases in the money supply are introduced and the sequence of changes on prices and production that might be then set in motion, Friedman’s theory precludes any real explanation of business cycles as they have historically occurred.

These arguments about the nature and assumptions in the Keynesian and Monetarist framework actually make up the second half of Garrison’s book.  I have summarized them first, so to more clearly emphasize what he wishes to offer as an alternative to them.  It is in the opening chapters of the Time and Money that he presents his Austrian exposition.  

What is missing from the standard macroeconomic approach is the realization that standing between the application of resources, including labor, and any resulting output is a required period of production.  Inputs do not instantaneously become outputs.  Furthermore, for resources to be turned into desired consumer goods, they invariably must pass through several steps of transformation, or stages of production, during which they are worked up into the finished products.  The metaphor of the automobile assembly line is a useful one.  At each stage along the conveyer belt, labor and machines are used to incorporate additional materials into the skeleton of the automobile, until after more and more parts have been added, the car is completed and ready to be sent off to the dealership for sale. 

But the stages of production not only occur in a particular and required sequence.  They are most often undertaken by different enterprises, the activities of which are temporally coordinated by the structure of relative prices through which inputs and outputs at each stage are interdependent and exchanged.  

Establishing the time structure of the stages of production, Garrison argues, is done through the rate of interest that brings into balance the amount of savings available both to maintain and deepen the structure of production over time, with the demand for investment funds by borrowers to undertake these investment activities.  Garrison uses a series of ingenious, interconnected graphs to present the relationships between the Austrian theory of capital structure, the rate of interest and economic growth in a way that is easy to understand and visualize.  He shows the effects on the production possibilities of a market economy and on the structure of production over time when there are changes in either the technological capabilities of industry or the time preferences of the income earners of the society.  

This all serves as the backdrop for Garrison to present his version of the Austrian theory of the business cycle.  There are many aspects of his reformulation to which attention could be given.  But I would like to focus on two of them: his analysis of the nature and significance of expectations in Austrian business cycle theory, and his conception of the conditions under which the Austrian story is mostly likely to be played out.

In 1943, Ludwig M. Lachmann wrote an article on, “The Role of Expectations in Economics as a Social Science.”xiii   Lachmann summarized and critically evaluated the integration of expectations into various theories of the market economy.  He explained that in this literature a distinction was made between “elastic” or “inelastic” expectations in relation to the rate of interest.  Market participants have “elastic” expectations if, when the interest rate goes down, they believe that this lower rate is relatively permanent and adjust their investment plans and horizons accordingly.  Such expectations are “inelastic” if market participants consider the decline in the rate of interest to be temporary, for example, one that has been engineered by the monetary authority through a credit expansion, and that the rate of interest is likely after a period of time to return to its previous level.  Under the latter circumstances, entrepreneurs are less likely to be “fooled” by the interest rate manipulation into undertaking longer-term investment projects that may be discovered later on to be unsustainable when the interest rate rises again.

Lachmann concluded that “the Wicksellian [Austrian] theory appears to be based on a very special assumption, viz., of a capital market without a strong mind of its own, always ready to follow a lead on the spur of the moment, and easily led into mistaking an ephemeral phenomenon for a symptom of a change in the economic structure.  Without fairly elastic expectations there can be no crisis of the Austro-Wicksellian type.”xiv

Later that same year, Ludwig von Mises wrote a short note in reply to Lachmann’s article, in which he said that he basically agreed with Lachmann’s argument.   Whether or not the entrepreneur was fooled by a credit expansion would depend upon whether he looked at the change in the rate of interest with the eyes of a businessman or with the eyes of an economist.  

“It is necessary to realize that market conditions brought about by credit expansion are such that the individual businessman cannot find any fault with the situation if he is a businessman only and does not view things with the eyes of an economist,” Mises said.  ”The economic consequences of credit expansion are due to the fact that it distorts one of the items of the speculator’s and investor’s calculation, namely, interest rates.  He who does not see through this, falls victim to an illusion; his plans turn out wrong because they were based on falsified data.  Nothing but a perfect familiarity with economic theory and a careful scrutiny of current monetary and credit phenomena can save a man from being deceived and lured into malinvestments.”xv    

And Mises pointed out that in his 1940 treatise, Nationalokonomie, (the German-language forerunner of Human Action) he had even said that: “The teachings of the monetary theory of the trade cycle are today so well known even outside of the circle of economists, that the naïve optimism which inspired the entrepreneurs in the boom periods has given way to a greater skepticism.  It may be that businessmen will in the future react to credit expansion in another manner than they did in the past.  It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom.  Some signs forebode such a change.  But is it too early to make a positive statement.”xvi

The Rational Expectations revolution in modern macroeconomics has in fact taken to an extreme this idea of the businessman looking at the events of the market through the eyes of the trained economist.  The “strong” version of the theory says that each market participant acts as if he possessed a perfect knowledge of the “correct” theory of how the market actually works, and has digested and interpreted all of the relevant factual evidence with all the exact precision of a trained econometrician.  Thus, any systematic manipulations of economic variables – such as the rate of interest – by the government will be completely discounted by market actors, because they will fully understand what the political authority is doing.  Thus, the only events that can “fool” market actors into being deceived and acting in a “non-rational” manner are random events or government “surprises” that could not be successfully anticipated on the basis of past patterns of government conduct.xviii  

While Garrison does not directly refer to either Lachmann’s article or Mises’ reply, he addresses this idea of “elastic” and “inelastic” expectations and uses it to criticize Rational Expectations theory in the context of Hayek’s theory of the use of knowledge in society.xviii He asks, why bother to have price-directed markets at all if it were true that both economists and market participants possessed all of the relevant information to successfully assure continuous and perfect coordination of all economic activities, even under conditions of change?  Indeed, if any one or group of people could possess this degree and type of knowledge why not just have central planning?  

The role of prices under conditions of imperfect knowledge in markets with continual change is precisely to have an institutional mechanism that enables actors to coordinate their activities without their needing to possess all “the data” of the market as a whole.  Market actors can use their special and localized knowledge of time and place in the division of labor without any of them possessing the global knowledge of the entire economic system.  

Garrison argues that obviously each participant must have at least some commonsensical understanding of market relationships, e.g., that if he lowers his price the quantity demanded for his product may increase.  Given the daily and detailed focus of each market participant on his own changing circumstances in the division of labor, there are costs to having either an interest in or a willingness to incur the time and expense to obtain knowledge outside of one’s required expertise, including the type of knowledge the economist or the policy maker claims to possess about the system as a whole. 

But under conditions of experienced surprise and error as a result of active government monetary and fiscal policy, market actors do reach respective threshold points at the margin at which acquisition of defensive knowledge to protect themselves from government policies seem worth the cost.  Thus, it cannot be claimed, as the Rational Expectation theorists tend to do, that from the outset all actors possess knowledge about everything there is to know about the nature of the workings of the interdependent market order and the consequences arising from various forms of government intervention.  

The type and amount of such wider knowledge invested in will depend on each individual’s circumstances and perceived benefits.  As a result, it is not realistic to assume, Garrison argues, that marketeers possess the same types of knowledge, not only in regard to their own specialized activities but also in relation to any general theory of the market.  Furthermore, there is no single, agreed upon theory of how the market works, so even the theories held by various people will differ, as well.  ”There is an overlap between the two kinds of [local and global] knowledge,” Garrison points out, “and the extent of the overlap is itself a result of the market process.  These aspects of Austrian theory have no counterpart in New Classical theory.”  (p.29)

Thus, the degree to which entrepreneurs hold “elastic” vs. “inelastic” expectations about what changes in the interest rate are telling them about “real” underlying market conditions will change over time as the consequences of government policy are experienced.  Many people may be fooled for a long time, before enough of them learn the lessons that make them begin to doubt that they can merely be guided in their decision-making by what the market’s intertemporal price seems to be telling them.

There is one aspect of this “trade-off” between acquiring local knowledge vs. global knowledge of the general market system that Garrison does not discuss.  It is that if market actors have acquired some general knowledge of the market and then, because of new circumstances, are able to shift back to giving their attention mostly to their local circumstances in the division of labor, that wider knowledge is not lost.  After an experience of credit expansion, inflation and the business cycle, the memory remains, both of the details of how it has effected various people in their respective corners of the market and what they have learned about the mechanisms and consequences of government policy in general.  

How long does this memory last over one or several generations before the government has the latitude to once again count upon the ignorance of the public to institute the same types of policies?  Many Germans, over several generations, seemed to have retained a “living memory” – even when it was based on what grandpa has told – about the dangers of monetary abuse and hyperinflation derived from the experiences of the early 1920s.  On the other hand, many traders in the financial markets during the 1990s seemed to think that what they were experiencing was a “new economy” in which the traditional business cycle and major stock market corrections were mostly things of the past.  Memories in this latter example seem to have been rather short.  

Austrian Economists, on the other hand, who were conversant with the arguments of Mises and Hayek about the events leading up to the Great Crash of 1929 should not have been surprised.  The 1990s saw dramatic growths in productivity and output, but a stable or mildly rising price level due to the Federal Reserve expanding the money supply sufficiently to prevent prices in general from slowly falling due to the lower costs of production and increased supplies of goods and services on the market.  The Fed had clearly kept interest rates below the “natural rate” through credit expansion, thus creating an imbalance between savings and investment beneath the apparent stability of a stable price level, similar to the consequences from Fed policy in the 1920s.

And this brings us to Garrison’s explanation of the workings of the Austrian theory of the business cycle.  The traditional Austrian story has run something like the following: the monetary authority increases the supply of credit and brings about a lowering of the market interest rate.  This stimulates additional investment borrowing in longer-term capital projects.  With the additional sums of money borrowed investors attract resources and labor away from short-term investment projects and consumer goods production.  As these resource owners and workers spend the higher money incomes that have induced them into these new investment projects, they increase the money demand for consumer goods under the assumption that their underlying time preferences for consumption vs. savings have not changed.  

The higher demand and rising prices in the consumer goods sectors of the economy enable consumer goods producers to bid back resources and workers into shorter-term investment and consumer goods manufacturing.  Unless the monetary authority increases the money supply again, and once more lends the funds to sustain the longer-term investment projects that have been started, a downturn begins in the long-term investment sectors of the economy bringing the “boom” to an end.

Garrison finds this story unsatisfactory, due to a criticism made by Sir John Hicks in his essay, “The Hayek Story.”  Hicks doubted the existence of any significant lag between when investors borrow the newly created money and when the borrowed money is paid out as higher factor incomes then spent on consumer goods.  Thus it was unlikely that any long-term investment boom could get underway and be sustained for any prolonged period of time before consumer goods prices began to rise enough to chock off the boom in relatively short order.  Yet, historically, investment booms have continued for years before the cycle has entered a downturn.  

In the light of Hicks’ criticism, Garrison retells the Austrian story by taking his cue from the type of analysis used by the Monetarists in explaining how in the short-run a monetary expansion can push unemployment and resource use below the “natural rate of unemployment.”  In the short-run, an economy always has some slack, even when it is operating at “full employment.”  Workers can for a time be induced to work overtime and marginal workers who otherwise would not be drawn into employment under “normal” conditions can be added to the work force.  Enterprises never operate their physical plant and equipment at one hundred percent of capacity, and also can be utilized above normal levels of operation for a period of time.

Thus, Garrison argues an economy has the capability of temporarily functioning beyond its “normal” full employment production possibilities.   This, he says, is what enables the investment boom to continue for a significant period of time before the “self-reversing” process of rising consumer demand brings the investment boom to a halt.  The longer-terms investment projects can continue for a prolonged period of time because simultaneous with this, the short-term slack in the economy enables consumer goods production to expand as well, delaying any reduced supply of consumer goods and a rise in their prices sufficient to swamp the investment boom.  Eventually, rising factor incomes and consumer goods prices do challenge the attempt to complete investment projects for the maintenance of which the real savings in the economy is not available.  Then the “bust” follows the “boom.”  The business cycle reaches its end.

Garrison’s analysis makes an important contribution, because it indirectly answers a criticism often made by Keynesians against the Austrians.  Why, if there is unemployment, should a credit expansion be harmful if it merely brings idle resources back into employment?  In this situation, consumer goods and investment goods production are not competing with each other, since there are sufficient resources and labor supply available to have more of both.  Garrison’s exposition explains why it is also important to look beneath the macroeconomic aggregates to the microeconomic patterns in which labor and resources are being reemployed.  They can be brought back into use making consumer goods and investment goods on the way to full employment in a manner that will be found to be inconsistent with the time preferences of income earners when the slack in the economy has been completely taken up.  At that point, it will be discovered that resources have been misdirected and will have to be reallocated for their uses to be consistent with the structure of consumer demand and actual savings in the economy. 

Furthermore, when Hayek first presented his version of Austrian business cycle theory in his 1929 book, Monetary Theory and the Trade Cycle, he was trying to show why an attempt to maintain a stable price level through credit expansion under conditions of a growing economy could being about an imbalance between savings and investment.  A growing economy due to productivity increases and cost-efficiencies would be increasing the available resources for an expanding output.  The production possibilities of the market would be increasing.  Thus, the ability to have both increased consumer goods and investment projects would be occurring.  But Hayek’s point was that by pushing the rate of interest below the “natural rate” under these circumstances, the relative amount of longer-term investment projects could be found, eventually, to be inconsistent with the available real savings even in a growing economy.  Thus, price level stabilization in this situation might very well be breeding an eventual investment downturn and correction.

Historically, it is true that most business cycles and the accompanying investment upturn have started when the economy has had such slack.  Indeed, Mises briefly analyzed this fact in a few places, saying that often a new cycle begins under the inducement of credit expansion when there are available idle resources left over from a previous cycle that have not been as yet fully reintegrated into the structure of production.  And, therefore, for a period of time, both consumer goods and investment goods expansion can occur simultaneously.xix   But eventually the competition for resources for both consumer goods production and the longer-term investments will create the “crisis” that leads to the downturn. 

And it is also true that in the real world, modern industrial economies have been growing when for one reason or another the monetary authority has superimposed a credit expansion that has stimulated additional investment projects, so that resources have, again, been available to feed an expansion of consumer goods output as well as new capital projects for a time.  But a point is reached when some of these projects may be found to exceed the actual savings available to maintain them in the longer-run, again leading to a downturn. 

Unlike Garrison, Hayek, however, did not find Hicks’ criticism convincing, and wrote a reply in 1969, shortly after Hicks’ essay appeared.xx Even if an economy was operating at full employment with no or very little slack, Hayek argued that a monetary expansion would still have the ability to bring about a prolonged misdirection of resources.  The reason for this, Hayek argued, was that an increase in the quantity of money, say, introduced through the loan market for investment activities, represents a new factor influencing the structure of relative prices, the relative profitabilities of producing more investment goods in comparison to consumer goods, and therefore modifies the allocation of resources among alternative uses in the economy.

The economist, analytically, may be able to distinguish between the structure of relative prices that would represent the underlying pattern of consumer demand and savings preferences in the absence of a credit expansion, in comparison to the “artificial” relative price structure “temporarily” induced by the creation of credit. But in the market there is only the pattern of demand reflected in the structure of money prices, which informs and guides producers in deciding upon courses of action in production.  And this market structure of relative prices is the result of all factors at work in the economy, including the influences brought about by the credit expansion.  

A credit expansion, even under conditions of absolute full employment, would still bring about a modification in the allocation of resources towards investment activities, and could be sustained for a considerable period of time, Hayek stated.  The reason, he said, is that the notion of a “lag” between when the created credit entered the market for investment activities and when it was transformed into high incomes for factors of production demanding more consumer goods, was a faulting distinction.  

The better choice of words, instead of a lag, would be a temporal sequence.  The demand for investment goods with the newly created credit preceded the receipt of that new money as higher factor incomes, which in turn preceded that higher money income reappearing on the market as a greater money demand for consumer goods.  As long as the monetary authority continued to expand credit, period after period and supplied it for investment activities, the impact on investment goods demand would always precede its temporal-sequential impact on the demand for consumer goods.  And if the monetary authority was willing to increase the supply of created credit as a rate sufficient to assure that the demand for and the prices of investment goods was always running ahead of the rising demand for and prices of consumer goods that trailed each monetary inject, then an investment boom could go on for an extended period of time.

Hayek’s own reply to Hicks is not mentioned or dealt with by Garrison.  He indirectly attempts to offer a response to Hayek by arguing that when the monetary authority artificially lowers the rate of interest, this not only induces greater investment spending, but also results in income earners choosing to save less and consume more due to the lower opportunity cost of forgoing consumption. Thus, simultaneously with the additional demand for investment goods is a higher demand for consumption goods.  But whether this change in consumption demand is great enough to counteract the greater demand for investment goods in terms of spending depends, it seems to me, upon the particular extent to which the quantity supplied of savings goes down relative to the amount of higher investment demand stimulated by the lower rate of interest.

Furthermore, even if there was a strong “propensity” to save less and consume more with this decrease in the rate of interest, it still seems possible that there could be a rate of credit expansion sufficiently large to assure that the higher investment spending still ran ahead of the greater demand for consumer goods for a prolonged period of time.  Thus, in principle, even without a temporary, short-run ability to expand the supply of factors of production, as the Monetarists and Garrison argue to be the case, the traditional Mises-Hayek formulation of the Austrian theory of the business cycle could still be shown to hold. 

But in spite of whatever disagreements or questions a reader may have with particular arguments that Roger Garrison develops in Time and Money, his book stands out as one of the most important works in Austrian monetary, capital and business cycle theory in the last fifty years.  It picks up where Hayek left off in the 1930s and 1940s, and offers the Austrian vista in a fresh and masterfully original manner.  It is a grand way for Austrian Economics to begin the 21st century.

• iAlec L. Macfie, Theories of the Trade Cycle (London: Macmillan, 1934) pp. 45 & 86.
• iiBenjamin Haggott Beckhart, review of The General Theory of Employment, Interest and Money in Political Science Quarterly (Dec. 1936) p. 602.
• iiiGeorge N. Halm, Monetary Theory: A Modern Treatment of the Essentials of Money and Banking (Philadelphia: The Blakiston Co., 1942).
• ivG. L. S. Shackle, “Some Notes on Monetary Theories of the Trade Cycle,” Review of Economic Studies, Vol.  I (1933-1934) pp. 27-38.
   
• vG. L. S. Shackle, The Years of High Theory: Invention and Economic Tradition, 1926-1939 (Cambridge: Cambridge University Press, 1967) pp. 96 & 229.
   
• viSir John Hicks, “The Hayek Story,” in Critical Essays in Monetary Theory (Oxford: Clarendon Press, 1967) pp. 203-215.
   
• viiF. A. Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation (London: Institute of Economic Affairs, 1972, 2nd ed., 1978).
   
• viiiGerald P. O’Driscoll, Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek (Kansas City: Sheed Andrews and McMeel, 1977
   
• ixMark Skousen, The Structure of Production (New York: New York University Press, 1990).
   
• xMark Skousen, Economics on Trial: Lies, Myths and Realities (Homewood, Ill: Business One Irwin, 1991).
• xiRoger W. Garrison, “Austrian Macroeconomics: A Diagrammatical Exposition,” in Louis M. Spadaro, ed., New Directions in Austrian Economics (Kansas City: Sheed Andrews and McMeel, 1978) pp. 167-204.
• xiiDavid Simpson, The End of Macroeconomics?  (London: Institute of Economics Affairs, 1994) p. 43.
• xiiiLudwig M. Lachmann, “The Role of Expectations in Economics as a Social Science” [1943] reprinted in Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (Kansas City: Sheed Andrews & McMeel, 1977) pp. 65-80.
   
• xivIbid., p. 79.
• xvLudwig von Mises, “Elastic Expectations and the Austrian Theory of the Trade Cycle,” Economica (August 1943) pp. 251-252.
   
• xviLudwig von Mises, Nationokonomie: Theorie des Handelns und Wirtschaftens [1940] (Munich: Philosophia Verlag, 1980) pp. 696-697; and in Human Action: A Treatise on Economics (Irvington-on-Hudson, NY: Foundation for Economic Education, 4th rev. ed., 1996) p. 797.
• xviiiaxviiibFor criticisms of Rational Expectations theory by “older” members of the Austrian School, see, Gottfried Haberler, “Notes on Rational and Irrational Expectations,” [1980] reprinted in Anthony Y. C. Koo, ed., Selected Essays by Gottfried Haberler, (Cambridge, MA: The MIT Press, 1985) pp. 603-617; and, Fritz Machlup, “The Rationality of ‘Rational Expectations’” Kredit und Kapital, Vol. 16, No. 2 (1983) pp. 172-183. 
   
• xixLudwig von Mises, Interventionism: An Economic Analysis [1941] (Irvington-on-Hudson, NY: Foundation for Economic Education, 1998) pp. 41-42; and Human Action, pp. 578-580.
• xxF. A. Hayek, “Three Elucidations of the Ricardo Effect,” [1969] reprinted in, New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978) pp. 165-178.