The Glass-Steagall Act Did Not Change the Most Important Weakness of the American Banking System

While breaking up big universal banks, the Glass-Steagall Act had no impact on the small unit banks that failed by the thousands. These banks typically didn't engage in corporate underwriting. Incredibly, as Benston noted, the Glass-Steagall Act "did not change the most important weakness of the American banking system—unit banking within states and the prohibition of nationwide banking." In fact, he says, "This structure is considered the principal reason for the failure of so many U.S. banks, some 90 percent of which were unit banks with under $2 million of assets."

--Jim Powell, FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Crown Forum, 2003), 64.

Today's China Has Much in Common with the NEP (New Economic Policy)-Era Soviet Union

The state’s dominant role in investment is evidence of a desire to “occupy the commanding heights.” This is a strategy originally described by Lenin in a 1922 address to the Fourth Congress of the Communist International on his New Economic Policy. The NEP, introduced in the previous year, was a retreat from earlier attempts to achieve a “direct transition to purely socialist forms,” as Lenin put it. These attempts, combined with the disastrous effects of the Russian Civil War, resulted in an economic collapse. The Soviet government had no choice but to restore a measure of private participation in the economy.

The fact that command economy methods had failed was not taken as a sign that they were unworkable. For Lenin, the problem was simply that their time had not yet come. He decided that a preliminary period of “state capitalism” would be necessary before “full communism” could be realized.

Retaining state control over key sectors was necessary to prevent a return to the prerevolutionary status quo during this transitional period. In his address, Lenin advocated (1) keeping the land and the “vital branches of industry” in the hands of the state, (2) leasing out “only a certain number of small and medium plants,” and (3) forming “mixed companies,” in which “part of the capital belongs to private capitalists—and foreign capitalists at that—and the other part belongs to the state.”

Surprisingly, despite being considerably more advanced economically, today’s China has much in common with the NEP-era Soviet Union. All land is state owned, as are many strategic sectors. The largest plants are almost all part of central government-controlled enterprises. Mixed companies, like those listed on the Hong Kong Stock Exchange, are quite common.

--Mark A. DeWeaver, Animal Spirits with Chinese Characteristics: Investment Booms and Busts in the World's Emerging Economic Giant (New York: Palgrave Macmillan, 2012), 24.

Only Free Banking Would Have Rendered the Market Economy Secure against Crises and Depressions

If banking were entirely “free,” meaning “capitalist” in the true sense of the word; if banks were not protected and regulated by the state; if they did not enjoy the privilege of a “lender of last” resort and, in particular, if that “lender of last resort” could not provide unlimited new reserves to the banks; if individual banks were under full risk of default just as any other true capitalist enterprise; and if the public knew this and acted accordingly, banking would be more limited and most certainly safer, not least for the economy as a whole. As Ludwig von Mises put it:

Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular—one is tempted to say normal—feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.

--Detlev S. Schlichter, Paper Money Collapse: The Folly of Elastic Money, 2nd ed. (Hoboken, NJ: John Wiley and Sons, 2014), 86.

Eminent Dutch Economist Nikolaas G. Pierson Wrote the First Exposition of the Economic Calculation Problem

Nikolaas G. Pierson was the most eminent Dutch economist of his day, and a sometime Prime Minister of Holland. His paper on ‘The Problem of Value in the Socialist Community’ was a direct reply to Kautsky’s celebrated speech at Delft in 1902, which Pierson had attended. Pierson’s paper, the first really clear exposition of the economic calculation problem, had very little influence until the 1920s, partly because it appeared in Dutch, and partly because its unassuming tone, its modest air of pointing out a few difficulties that would confront socialism, no doubt concealed from all but the most attentive readers the possibility that these difficulties might be intractable. The true significance of the piece was probably further obscured by the fact that Pierson begins it (after a somewhat rambling introduction) by concentrating on the problem of how a socialist nation-state would conduct its foreign trade. There were still Marxists who denied that there could be such a thing as a socialist nation-state, or that there could be ‘foreign trade’ under socialism, but Pierson takes Kautsky’s recent concessions as his point of departure. A further contribution to the piece’s obscurity is that Pierson’s textbook on economics (1912) briefly discusses socialism but makes no mention of the economic calculation problem.

--David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.

Keynes's Law That Marginal Propensity to Save Increases with Income Is False, Thus Invalidating the Justification for Highly Progressive Income Taxes

Friedman wasn't the only one who cast doubts on Keynes's theories. He verified Simon Kuznets's studies at NBER denying Keynes's "psychological law" that the "marginal propensity to save" increases with income, at least on a countrywide level. Kuznets, who later won a Nobel Prize, showed that since 1899 the percentage of income saved has remained steady despite a substantial rise in real income. This discovery was all the more important because the Keynesians used the idea of an increasing propensity to save by the wealthy to justify highly progressive income and estate taxes as a way to encourage a high-consumption society and avoid stagnation. According to the Keynesians, consumption was the key stimulant to short-term economic performance and progressive taxation would raise a country's propensity to consume. Now, under the weight of historical evidence, the Keynesian prescription appeared impotent.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

The Keynesian Consumption Function Is Fundamentally Flawed and the Expenditure Multiplier Is Closer to 1 Than the Textbook Version of 4 or 5

Friedman demonstrated that the Keynesian consumption function did not fit the historical evidence. Crucial to the Keynesian case for increased government spending to bring about full employment is the consumption function--the notion that there is a stable short-term relationship between household consumption spending and household current income. According to the Keynesian model, government spending would increase household incomes through a leveraged multiplier effect. However, using a massive study of consumption data in the United States, Friedman showed that households adjust their expenditures only according to long-term or permanent income changes, and pay little attention to transitory patterns. Therefore, the Keynesian consumption function was fundamentally flawed and any leveraging of government expenditures through the multiplier would be much smaller than expected. Friedman's diligent and comprehensive work set a new high standard of empirical scholarship, and later research by Franco Modigliani, James Tobin, and other Keynesians confirmed this "life-cycle" or "permanent income" hypothesis of consumption. Further studies over the years validated Friedman's conclusion that the expenditure multiplier is closer to 1 than the textbook version of 4 or 5.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

Gross Domestic Product (GDP) or Gross Output (GO): Measuring the "Use" Economy or the "Make" Economy

What is Gross Output? It is an attempt to measure total sales volume at all stages of production, what we might call the "make" economy. Most importantly, it includes all business-to-business (B2B) transactions that GDP leaves out. In the third quarter of 2014, GO hit $31.3 trillion, almost twice the size of GDP, which was $17.6 trillion.

GDP is the standard yardstick for measuring the value of final goods and services purchased by consumers, businesses, and government in a year, what we call the "use" economy. While GDP measures the "use" economy, now with GO we have a way to measure the "make" economy every quarter too. Finally, we have a full picture of the economy.

--Mark Skousen, introduction to the new revised edition of The Structure of Production, new rev. ed. (New York: New York University Press, 2015), Kobo e-book.

According to Menger, Income Is Not Distributed; It Is Produced

The Marginalist Revolution solved another quagmire in economic theory: Menger taught a new generation of economists that production and distribution could once again be linked together. The demand of consumers ultimately determines the final prices of consumer goods, which in turn sets the direction for productive activity. Final demand establishes the prices of the cooperative factors of production--wages, rents, and profits--according to the value they add to the production process. In short, income is not distributed, it is produced, according to the value added by each participant. Under this new brand of microeconomics, profits and use are directly connected through their marginal utility. Prices reflect the consumer's most highly valued (marginal) utility, and profit-driven production seeks to meet those needs.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.

Hayek Does Not Claim That "Greed Is Good"; He Claims That Greed Can Have Good Consequences

His writings on markets bring out the way in which the liberal ‘great society’ that he favours rests upon actions which may be morally unlovely. It also involves the operation of rules which may generate consequences which are morally problematic. Hayek is not arguing that, in the phrase from Wall Street, ‘greed is good’. Rather, he is arguing, with Mandeville, that greed can have good consequences—which is a rather different matter. Similarly, Hayek argues, with Hume, that the system of justice upon which a ‘great society’ rests may also generate specific legal decisions which may look grim, from a moral point of view. . . .

Why this matters is brought out by the other theme in Hayek’s work with which we will again here be concerned: the way in which the kind of society that he favours—and which he argues is the best that we can attain—is maintained by the actions of individuals who are, for the most part, blind to the systematic consequences of their actions.

--Jeremy Shearmur, introduction to Hayek and After: Hayekian Liberalism as a Research Programme, Routledge Studies in Social and Political Thought 1 (London: Routledge, 2003), 10.

Hyperinflations Are Caused by the Financing of Huge Public Budget Deficits Through Money Creation

In this section it will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge public budget deficits through money creation. . . .

The figures demonstrate clearly that deficits amounting to 40 per cent or more of expenditures cannot be maintained. They lead to high and hyperinflations, reforms stabilising the value of money or in total currency substitution leading to the same result. . . .

The examples of both Germany and Bolivia suggest that at least deficits of about 30 per cent or more of gross domestic product are not maintainable since they imply hyperinflations.

--Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships (Cheltenham, UK: Edward Elgar Publishing, 2003), 69, 71.

The French Revolution Had the First Hyperinflation in History

In the last chapter we studied the development of inflation during the American War of Independence as a case nearly approaching hyperinflation. In this chapter we begin by analysing whether the French hyperinflation during the Revolution, which was the first hyperinflation in history, shows similar characteristics. This inflation, moreover, is the only hyperinflation in history during a time when most other countries were still on a silver or gold standard (Britain suspended convertibility only in 1797). . . .

During the French Revolution beginning in 1789 it soon became impossible to cover the financial requirements of the state, including the revolutionary wars, from ordinary revenues, especially since the Assemblée Nationale had lowered the taxes which were perceived by the population as repressive. To finance the budget deficit the new authorities soon issued the assignats, which were constructed to be guaranteed by land, since their holders could later use them to acquire former Church property which had been nationalised. These assignats could first only be transferred through a formal endorsement, like drafts. They still mentioned the King and were denominated in livres which had until then only been a money of account, that is they had never circulated as currency before.

Soon more and more assignats were issued, turned into bearer papers, the royal name on them was removed and their denomination changed to francs (1 franc = 1 livre). Devaluation of the currency and inflation began.

--Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships (Cheltenham, UK: Edward Elgar Publishing, 2003), 65-66.

LSE's Lionel Robbins Argued That the Free Market Economy Had Been Replaced by Another Regime Since World War I

Lionel Robbins, a well-known London School of Economics professor, was also among the economists who argued that the free market economy had been replaced by another regime since World War I. “The essence of pre-war capitalism,” he wrote in 1934, “was the free market . . . in the sense that the buying and selling of goods and the factors of production was not subject to arbitrary interference by the State or strong monopoly controls.” Since World War I, he said, the free market “has tended to be more and more restricted”by state intervention. He wrote:

The cartelisation of industry, the growth of the strength of trade unions, the multiplication of State controls, have created an economic structure which, whatever its ethical or aesthetic superiority, is certainly much less capable of rapid adaptation to change than the older more competitive system. Certainly no one who wishes to understand the persistence of the maladjustments of the great slump can neglect the element of inelasticity and uncertainty introduced by the existence of the various pools and restriction schemes, the rigidities of the labour market and cartel prices which are the characteristic manifestation of these developments. These tendencies are the creation of policy.

He concluded that the Great Depression was not due to the conditions of capitalism but “to their negation”:

It was due to monetary mismanagement and State intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy. Ever since the outbreak of war in 1914, the whole tendency of policy has been away from that system . . .

 --Pierre Lemieux, Somebody in Charge: A Solution to Recessions? (New York: Palgrave Macmillan, 2011), 65-66.

Mussolini Asks about Roosevelt's New Deal: Just How Much “Fascism” Does the American President’s Program Contain?

There was hardly a commentator who failed to see elements of Italian corporatism in Roosevelt’s managed economy under the National Recovery Administration, the institution formed in 1933 to maintain mandatory production and price “codes” for American industry. The Italian press was quite taken with these similarities, and Mussolini laid the groundwork for such comparisons in a book review he wrote of Roosevelt’s Looking Forward. On the one hand, he identified a spiritual kinship:

The appeal to the decisiveness and masculine sobriety of the nation’s youth, with which Roosevelt here calls his readers to battle, is reminiscent of the ways and means by which Fascism awakened the Italian people.

In other passages, Mussolini was more reserved:

The question is often asked in America and in Europe just how much “Fascism” the American President’s program contains. We need to be careful about overgeneralizing. Reminiscent of Fascism is the principle that the state no longer leaves the economy to its own devices, having recognized that the welfare of the economy is identical with the welfare of the people. Without question, the mood accompanying this sea change resembles that of Fascism. More than that cannot be said at the moment.

Mussolini’s reserve reflected the customary etiquette among world leaders, who try to avoid appearing partisan: in July 1933, the month Mussolini’s review appeared, his press department was ordered not to describe the New Deal as Fascist because it might provide welcome ammunition to Roosevelt’s political enemies at home. A year later, Mussolini was sufficiently convinced of the strength of the president’s position to be rather less diplomatic in his choice of words. In his review of the Italian edition of New Frontiers, a book written by Roosevelt’s secretary of agriculture, Henry A. Wallace, Mussolini wrote:

The book as a whole is just as “corporativistic” as the individual solutions put forth in it. It is both a declaration of faith and an indictment of economic liberalism. . . . Wallace’s answer to the question of what America wants is as follows: anything but a return to the free-market, i.e., anarchistic economy. Where is America headed? This book leaves no doubt that it is on the road to corporatism, the economic system of the current century.

--Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939, trans. Jefferson Chase (New York: Metropolitan Books, 2006), e-book.

The History of the State’s Dealings with Money Is a Long History of Lies and Fraud

The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.” 

--Friedrich von Hayek

Today holders of bank notes cannot demand to be paid in precious metal. Recall the speech by the president of the German Bundesbank, Jens Weidmann: “Modern money is not backed by any physical asset. Bank notes are printed paper — those knowledgeable among you know that in the case of the euro, it is made of cotton.”

Just as a passing thought: just for fun, send a 5-euro note to the European central bank or a 5-dollar bill to the Fed. Include a friendly letter and ask for it to be redeemed. If you receive an answer at all, it will consist of a nice letter and a different 5-euro note or 5-dollar bill.

At any rate, history has run its course and you can now understand Hayek’s statement that the history of the state’s dealings with money is a long history of lies and fraud.

The origins of the symbiotic relationship between the state and the banking system, to the benefit of both, goes far back in history. So far back that most of the people living today know only a paper money system; they do not question it because they have known nothing else.

Ludwig von Mises in his 1949 book Human Action wrote:

It is a fable that governments interfered with banking in order to restrict the issue of fiduciary media [bank notes] and to prevent credit expansion. The idea that guided governments was, on the contrary, the lust for inflation and credit expansion.

Governments gave banks privileges because they wanted to remove the limits that market money puts on credit expansion, or because they were eager to make available to the treasury an additional source of revenue.

--Andreas Marquart and Philipp Bagus, Blind Robbery! How the Fed, Banks and Government Steal Our Money (München: FinanzBuch Verlag, 2016), e-book.

The 5 Key Insights of "Austrian Finance," an Alternative Theory to Modern Finance

Chapter 11 presents the main building blocks to an alternative theory to Modern Finance, which I call Austrian Finance. As explained above, economics and finance are social sciences. They need to analyze and describe the patterns of behavior of individuals, groups and societies, in order to make qualitative predictions. The key insights of this analysis are: (1) people base their action on subjective knowledge; (2) they minimize the time it takes to reach their objectives and hence have positive time preferences and positive "natural" interest rates; (3) markets are in a continuous dynamic disequilibrium; (4) uncertainty is radical and cannot be measured; (5) the diversification of portfolios serves the purpose of reducing the consequences of errors and follows the rule of diminishing benefits from diversification.

--Thomas Mayer, introduction to Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge, 2018), Kobo e-book.

The Nazi Press Enthusiastically Hailed the Early New Deal Measures: America, Like the Reich Had Broken with the Frenzy of Market Speculation

Critics of Roosevelt's New Deal often liken it to fascism. Roosevelt's numerous defenders dismiss this charge as reactionary propaganda; but as Wolfgang Schivelbusch makes clear, it is perfectly true. Moreover, it was recognized to be true during the 1930s, by the New Deal's supporters as well as its opponents. . . . 

The Nazi press enthusiastically hailed the early New Deal measures: America, like the Reich, had decisively broken with the "uninhibited frenzy of market speculation." The Nazi Party newspaper, the Völkischer Beobachter, "stressed 'Roosevelt's adoption of National Socialist strains of thought in his economic and social policies,' praising the president's style of leadership as being compatible [to] Hitler's own dictatorial Führerprinzip." . . .

Mussolini, who did not allow his work as dictator to interrupt his prolific journalism, wrote a glowing review of Roosevelt's Looking Forward. He found "reminiscent of fascism. . .the principle that the state no longer leaves the economy to its own devices"; and, in another review, this time of Henry Wallace's New Frontiers, Il Duce found the Secretary of Agriculture's program similar to his own corporativism.

--David Gordon, review of Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, by Wolfgang Schivelbusch, Mises Review 12, no. 3 (Fall 2006).

On the Keynesian "Bankers Gone Wild" Hypothesis of Credit Bubbles: Deregulation of Financial Markets, Financial Fragility, Too Much Bad Debt, a "Minsky Meltdown," the Market Failure, and the Credit Crisis

There are two main theories of why we had a credit bubble, and we might as well call them 'Keynesian' and 'Austrian'. In the Keynesian story, there is an irrational expansion of credit, perhaps because creditors under-estimate the risks they are taking. Paul Krugman represents this view rather well. In good economic times 'debt looks safe' and 'the memory of the bad things debt can do fades into the mists of history. Over time, the perception that debt is safe leads to more relaxed lending standards'. Eventually, bankers will become complacent and forgetful, at which point they start making a lot of bad loans. With all that bad debt, there must come a moment of crisis, which Paul McCulley has dubbed the 'Minsky moment'. Such a moment is 'the point at which excess leverage cannot be sustained and the system unravels'. It is called the 'Minsky moment' because the idea of such 'financial fragility' comes from the Keynesian economist Hyman Minsky, whom Krugman cites. Janet Yellen tells a similar tale when she calls the crisis a 'Minsky meltdown', although she admits that 'Fed monetary policy may also have contributed to the U.S. credit boom'.

Krugman, Yellen and others have used the terms such as 'Minsky moment' and 'Minsky meltdown' to suggest that the crisis is an example of market failure. The basic idea is that we had deregulation of financial markets in the US and elsewhere, which led to a lot of irresponsible lending and, ultimately, a credit crisis.  The 'combination of deregulation and failure to keep regulations updated', Krugman explains, 'was a big factor in the debt surge and the crisis that followed'. It is true that there was a kind of selective deregulation before the crisis. But the idea that excess lending was somehow a market failure overlooks a big important fact: too big to fail. The bankers were gambling with other people's money. As I discuss below, they had plenty of incentive to lower their lending standards. And if the bottom falls out? Well, we will get a bailout.

--Roger Koppl, introduction to From Crisis to Confidence: Macroeconomics after the Crash, Hobart Paper 175 (London: The Institute of Economic Affairs, 2014), 7-8.

From Neoclassical Equilibrium Theory to an Evolving Complex Adaptive System Theory

The purpose of this book is to put forward an alternative to neoclassical equilibrium theory. The limitations of equilibrium theory have become increasingly apparent in recent years, particularly to those economists who attempt to use it to explain the workings of an actual market economy, whether in offering policy advice to politicians and businessmen, or simply in interpreting events to a wider public. In response to rising dissatisfaction, neoclassical economists have offered some modest modifications to the standard theory, but these modifications have generally taken the form of accommodating new assumptions to the requirements of the existing model rather than to reality. This is not a satisfactory scientific procedure.

In the last ten years a quite different approach to economic theory, in which the market economy is treated as an evolving complex adaptive system, has emerged, but it has yet to capture the imagination of the profession or the wider public. The rather cool reception which this approach has so far received may in large part be explained by its presentation. It has been treated by its proponents as if it were a mathematical technique originating in the natural sciences which may have some limited applications in some specific aspects of economics and the other social sciences. In fact, as we shall show, its underlying principles of self-organisation and evolution can trace their intellectual origins to seventeenth and eighteenth-century philosophers of society. Its perspective is of perfectly general application to all branches of science. Furthermore, it does something which equilibrium theory, originating in nineteenth-century mechanics, fails to do, which is to distinguish clearly between human and non-human phenomena.

--David Simpson, introduction to Rethinking Economic Behaviour: How the Economy Really Works (Houndmills, UK: Macmillan Press, 2000), 1-2.

Mainstream Macroeconomics and Modern Finance Do Not Work in the Fields of Economic Policy and Finance

During the Great Financial Crisis of 2007-08, the financial skyscrapers fell down. The general public blamed the greed and irresponsibility of bankers for the catastrophe. Politicians and academics in economics and finance joined in on the banker bashing as it distracted attention from their own contribution to the mess. I do not want to whitewash the bankers. But in this book I shall make the case that mainstream macroeconomics and Modern Finance deserve a fair share of the blame. They produced theories which may have been internally consistent, but not applicable to the real world. Nothing would have happened, had they remained a pastime for the residents of the ivory towers. But they broke out and guided decision making in economic policy and financial activities.

What is to be done now? In this book, I argue that practitioners in economic policy and the financial sector need to go back to practical knowledge, based on common sense and experience gained from trial and error. Physical science can be successfully applied in construction, but mainstream macroeconomics and modern finance do not work in the fields of economic policy and finance. What is then left for economics and finance as sciences? Economics and finance are social sciences and follow rules that are different from those of natural sciences. They are unable to derive reliable quantitative impulse response functions for individuals, groups or societies as a whole in the way natural sciences do for objects. But they can analyze and describe the patterns of behavior of individuals, groups and societies. Based on the recognition of such patterns, they can make qualitative predictions. In this book, I shall argue that the Austrian school of economics provides a highly useful base for rethinking macroeconomics and finance from a sociological perspective.

--Thomas Mayer, introduction to Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge, 2018), Kobo e-book.

Three Principal Hallmarks of Classical Economics: Growth of the Economy, Processes of Continuing Change, and the Interaction of Individuals

The purpose of this book is to put forward an alternative to equilibrium economics, the paradigm that has dominated the mainstream of economic thought for the best part of a century. That alternative is what may be called classical economics, namely the intellectual tradition that began with Adam Smith, evolved in the nineteenth century, was continued in the twentieth century by Marshall and the Austrians amongst others, and is today represented by theorists of complexity.

The hallmarks of the classical tradition are principally three. The first is the belief that the growth of the economy, rather than relative prices, should be the principal object of analysis. Coupled with that belief is an understanding of the market economy as a collection of processes of continuing change rather than as a structure, and that the nature of this change is self-organising and evolutionary. Finally there is a conviction that economic activity is rooted in human nature and the interaction of individual human beings. Many people might suppose from the similarity of the terms 'classical' and 'neoclassical' that the one school of economic thought is closely related to the other. In fact, as this book will try to show, they are more nearly exact opposites.

--David Simpson, introduction to The Rediscovery of Classical Economics: Adaptation, Complexity and Growth, New Thinking in Political Economy (Cheltenham, UK: Edward Elgar Publishing, 2013), 1.

The Pre-Keynesian Classical Theory of Recession Is Based on Disharmony between the Structure of Supply and the Structure of Demand

The structure of production refers to the way in which an economy as a whole fits together. Every output has their inputs, and each of those inputs has inputs of their own, and so on throughout the whole of the economy. There are literally an unquantifiable number of individual units of capital, workers and potential workers each of every kind who collectively possess a vast array of skills and abilities, along with resources of every kind found in different places undertaking particular roles. All of these inputs must be fit together to produce the output that is part of a process that eventually brings to us the goods and services we consume. Keynesian economics thinks in terms of aggregates, entire blocks of buyers and producers. Economic theory properly conceived instead looks at the atomic structure of the economy, at each of the individual productive components separately to understand how they can all be made to work together in a productive way. Moreover, Keynesian economics focuses almost entirely on final demand and ignores the actual structure of the economy, which it treats as irrelevant. Pre-Keynesian classical theory, on the other hand, thought of the structure as the crucial issue. They focused on whether the structure of production was synchronized with what buyers were spending their money on. For classical economics, it was whether the structure of supply could rapidly conform to the structure of demand that was the matter of first importance in understanding how well an economy worked. The Pre-Keynesian theory of recession was based on explaining why the structure of supply and the structure of demand might no longer be in harmony. Policy during recessions was therefore directed towards restoring this balance by hastening, as best a government could, the readjustment of the economy until the structure of supply and demand were in conformity once again.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

On the Basis of the Law of Markets, No Obstacle to Growth Exists on the Demand Side so long as Production Corresponds to the Demands of Buyers

Classical economists had a different and far more penetrating understanding of the nature of recession and the business cycle than Keynes, or indeed most modern interpreters of classical theory, give them credit for. And, in what may be the greatest irony of all, it will be shown that the theory of the cycle held by classical economists was based on an understanding of Say's Law. That is, far from being an impediment to understanding the causes of recession and unemployment, Say's Law was a fundamental part of the theory which explained their occurrence.

What will be shown is that the basis of the classical theory of the cycle was the structure of demand rather than the level of demand. Classical economists argued, on the basis of the law of markets, that no obstacle to growth existed on the demand side, so long as production corresponded to the demands of buyers. Classical theory explained recessions by showing how errors in production might arise during cyclical upturns which would cause some goods to remain unsold at cost-covering prices.

--Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 19.

Keynesians Represent Profits as Resulting From (1) A Difference between the Rate of Interest and the "Marginal Efficiency of Capital," and/or (2) Monopoly and High-Pressure Salesmanship

Keynesians usually represent profits as resulting from either or both of: (1) a difference between the rate of interest and the "marginal efficiency of capital," (2) monopoly and high-pressure salesmanship. In either case, the recipient of profits is given little or no credit for earning them by useful service.

This Keynesian antipathy or indifference to the qualities developed in free markets arises from the belief that free markets are economically undesirable (e.g., the capital markets) and politically impracticable (e.g., the labor market).

Moreover, as difficulties arise in carrying out their proposals for "socializing" saving and investment, economists of this persuasion usually advocate more restriction of markets rather than less. Thus Dr. Lawrence Klein, for example, favors government price control to prevent inflation that might result from Keynesian "loan expenditures," and he rationalizes this repudiation of freedom of exchange by the contention that "greedy profiteering" was the only liberty infringed by the Office of Price Administration in World War II.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 89-90.

Keynes Launched a Frontal Assault on the Price System When He Declared That Interest Rates Are Too High

Keynes: Interest rates are too high:

The rate of interest is not self-adjusting at a level best suited to the social advantage but constantly tends to rise too high. . . .

Comment: This is a frontal assault on the entire price system.

Keynes does not define any of his terms. He does not say what the “social advantage” is. He does not tell us how we will know when interest rates have fallen far enough. Nevertheless, he has told us something important—that the price system cannot be trusted.

It is important to keep in mind that interest rates are a price, the price of borrowed money. They are not only a price; they are one of the most important prices in an economy. All prices are interconnected, but this price in particular affects all other prices.

Businesses depend on prices to give them the information with which to run the economy. If the price system for interest rates is broken, no part of the price system is unaffected. If the price system is hobbled, it is a very serious matter because attempts to replace market prices with government-imposed prices have not generally been successful. As Oysten Dahle, a Norwegian oil executive, said about the Soviet Union, “[It] collapsed because it did not allow [market] prices to tell the economic truth.”

--Hunter Lewis, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts, rev. ed. (Mount Jackson, VA: Axios Press, 2011), 89-90.

The Basic Fallacy of Keynesian Theory Is Treating Goods and Credit as Two Quite Separate Things

This brings us to what is perhaps the basic fallacy of Keynesian thought. The Keynesian economist treats of goods and credit as though they were two quite separate things. He teaches that the output of goods creates a need for credit and currency. He warns that goods may go unsold, forcing down prices and causing unemployment, unless government: (1) adds to the supply of currency as the output of goods increases, and (2) sees to it that those who get the new money spend it promptly.

The classical view, on the other hand, is that goods themselves are the source of all sound credit and sound currency. Let us see what this means.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 56.

The Mixed Economy of the Keynesians Is Highly Unstable Moving from Crisis to Crisis and from Emergency to Emergency

Professor Ludwig von Mises, in his scholarly but readable little books, Bureaucracy and Planned Chaos, shows perhaps better than any other modern author why government interference with the free market leads to crisis, totalitarianism, and war. Every interventionist measure results in conditions which are even less satisfactory than those which preceded it, as shortages follow price control and black markets follow rationing. Yet, those who favor such intervention usually blame the evil results of their measures on the selfishness, stupidity, or perverseness of individuals. Then they urge more coercion to deal with the new problems. Thus, for example, Samuelson fears that producers may "react perversely" to government spending and subsidies, so that prices and wage rates may rise before full employment has been achieved. In that case, he intimates, the government may have to apply price and wage controls to stop inflation.

The "mixed economy" advocated by the Keynesian economists, therefore, is highly unstable. It moves from crisis to crisis, from one emergency to another, while the currency depreciates, producers are demoralized, demagogy increases, government becomes more despotic, and international friction mounts. This spiral towards totalitarianism and war persists as long as faith in coercion and government planning prevails over a preference for voluntarism and free enterprise.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 72-73.

The Federal Reserve as a Cartelization Device

In fact, the Fed was largely fashioned by the banks as a cartelizing device. The government interventions of the Progressive era were systemic devices to restrict competition and cartelize industry, stratagems that followed on the previous failure of industry to sustain successful voluntary cartels. Just as other industries turned to the government to impose cartelization that could not be maintained on the market, so the banks turned to government to enable them to expand money and credit without being held back by the demands for redemption by competing banks. In short, rather than hold back the banks from their propensity to inflate credit, the new central banks were created to do precisely the opposite. Indeed, the record of the American economy under the Federal Reserve can be considered a rousing success from the point of view of the actual goals of its founders and of those who continue to sustain its power.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 464.

The Original Gold Standard Did Not Submit Wage-Policies to Dictation But Made Them the Resultant of Impersonal Forces

Lord Keynes, however, is, I think, not right in saying that ‘the error of the gold standard lay in submitting national wage-policies to outside dictation’. The original gold standard did not submit wage-policies to dictation, by governing authority anywhere, but made them the resultant of impersonal forces issuing out of the disposition, and potentiality, of individuals to follow what they conceived to be their own interest. This system, as Professor Hayek points out, had many virtues, and we should be badly advised if we should throw away its virtues along with its imperfections. The automaticity of the gold standard was, per se, all to the good, and what we need is a similarly automatic system which will be free of the vices of the traditional gold standard. We should not forget that the once well-nigh universal adhesion to the gold standard was spontaneous rather than imposed, and that it was only after the gold standard had been subjected to varying national management, in an attempt to overcome the original objections against it, that it was abandoned by those countries that could not make their ideas on its management effective, that is, after (unstable) price levels had been imposed from without.

--Friedrich A. von Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation, ed. Sudha R. Shenoy, 3rd ed. (London: The Institute of Economic Affairs and the Ludwig von Mises Institute, 2009), 50.

Keynes Has Given Us a System of Economics Which Is Based on the Assumption That No Real Scarcity Exists

Now such a situation, in which abundant unused reserves of all kinds of resources, including all intermediate products, exist, may occasionally prevail in the depths of a depression. But it is certainly  not a normal position on which a theory claiming general applicability could be based. Yet it is some such world as this which is treated in Mr. Keynes' General Theory of Employment, Interest and Money, which in recent years has created so much stir and confusion among economists and even the wider public. Although the technocrats, and other believers in the unbounded productive capacity of our economic system, do not yet appear to have realised it, what he has given us is really that economics of abundance for which they have been clamouring so long. Or rather, he has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices. These prices are in no way explained, but are simply assumed to remain at their historically given level, except at rare intervals when "full employment" is approached and the different goods begin successively to become scarce and to rise in price.

--Friedrich A. Hayek, The Pure Theory of Capital (1941; repr., Auburn, AL: Ludwig von Mises Institute, 2009), 373-374.

Economic Education Must Unmask and Must Refute the Ten Main Theses of "Progressive Economics"

The doctrines which are taught today under the appellation “Progressive economics” can be condensed in the following ten points.

1. The fundamental economic thesis common to all socialist groups is that there is a potential plenty, thanks to the technological achievements of the last two hundred years. The insufficient supply of useful things is due merely, as Marx and Engels repeated again and again, to the inherent contradictions and shortcomings of the capitalist mode of production. Once socialism is adopted, once socialism has reached its "higher stage," and after the last vestiges of capitalism have been eradicated, there will be abundance. To work then will no longer cause pain, but pleasure. Society will be in a position to give "to each according to his needs." Marx and Engels never noticed that there is an inexorable scarcity of the material factors of production. 
• The academic Progressives are more cautious in the choice of terms, but virtually all of them adopt the socialist thesis.
2. The inflationist wing of Progressivism agrees with the most bigoted Marxians in ignoring the fact of the scarcity of the material factors of production. It draws from this error the conclusion that the rate of interest and entrepreneurial profit can be eliminated by credit expansion. As they see it, only the selfish class interests of bankers and usurers are opposed to credit expansion.
• The overwhelming success of the inflationist party manifests itself in the monetary and credit policies of all countries. The doctrinal and semantic changes that preceded this victory, which made this victory possible and which now prevent the adoption of sound monetary policies, are the following:
• Until a few years ago, the term inflation meant a substantial increase in the quantity of money and money-substitutes. Such an increase necessarily tends to bring about a general rise in commodity prices. But today the term inflation is used to signify the inevitable consequences of what was previously called inflation. It is implied that an increase in the quantity of money and money-substitutes does not affect prices, and that the general rise in prices which we have witnessed in these last years was not caused by the government's monetary policy, but by the insatiable greed of business. 
• It is assumed that the rise of foreign exchange rates in those countries, where the magnitude of the inflationary increment to the quantity of money and money-substitutes in circulation exceeded that of other countries, is not a consequence of this monetary excess but a product of other agents, such as: the unfavorable balance of payments, the sinister machinations of speculators, the "scarcity" of foreign exchange, and the trade barriers erected by foreign governments, not by one's own.
• It is assumed that a government, which is not on the gold standard and which has control of a central bank system, has the power to manipulate the rate of interest downward ad libitum [at will] without bringing about any undesired effects. It is vehemently denied that such an "easy money" policy inevitably leads to an economic crisis. The theory, which explains the recurrence of periods of economic depression as the necessary outcome of the repeated attempts to reduce interest rates artificially and expand credit, is either intentionally passed over in silence or distorted in order to ridicule it and to abuse its authors.
3. Thus the way is free to describe the recurrence of periods of economic depression as an evil inherent in capitalism. The capitalist society, it is asserted, lacks the power to control its own destiny. 
4. The most disastrous consequence of the economic crisis is mass unemployment prolonged year after year. People are starving, it is claimed, because free enterprise is unable to provide enough jobs. Under capitalism technological improvement which could be a blessing for all is a scourge for the most numerous class.
5. The improvement in the material conditions of labor, the rise in real wage rates, the shortening of the hours of work, the abolition of child labor, and all other "social gains" are achievements of government pro-labor legislation and labor unions. But for the interference of the government and the unions, the conditions of the laboring class would be as bad as they were in the early period of the "industrial revolution."
6. In spite of all the endeavors of popular governments and labor unions, it is argued, the lot of the wage earners is desperate. Marx was quite right in predicting the inevitable progressive pauperization of the proletariat. The fact that accidental factors have temporarily secured a slight improvement in the standard of living of the American wage earner is of no avail; this improvement concerns merely a country whose population is not more than 7 percent of the world's population and moreover, so the argument runs, it is only a passing phenomenon. The rich are still getting richer; the poor are still getting poorer; the middle classes are still disappearing. The greater part of wealth is concentrated in the hands of a few families. Lackeys of these families hold the most important public offices and manage them for the sole benefit of "Wall Street." What the bourgeois call democracy means in reality "pluto-democracy," a cunning disguise for the class rule of the exploiters.
7. In the absence of government price control, commodity prices are manipulated ad libitum [at will] by the businessmen. In the absence of minimum wage rates and collective bargaining, the employers would manipulate wages in the same way too. The result is that profits are absorbing more and more of the national income. There would prevail a tendency for real wage rates to drop if efficient unions were not intent upon checking the machinations of the employers.
8. The description of capitalism as a system of competitive business may have been correct for its early stages. Today it is manifestly inadequate. Mammoth-size cartels and monopolistic combines dominate the national markets. Their endeavors to attain exclusive monopoly of the world market result in imperialistic wars in which the poor bleed in order to make the rich richer.
9. As production under capitalism is for profit and not for use, those things manufactured are not those which could most effectively supply the real wants of the consumers, but those the sale of which is most profitable. The "merchants of death" produce destructive weapons. Other business groups poison the body and soul of the masses by habit-creating drugs, intoxicating beverages, tobacco, lascivious books and magazines, silly moving pictures, and idiotic comic strips. 
10. The share of the national income that goes to the propertied classes is so enormous that, for all practical purposes, it can be considered inexhaustible. For a popular government, not afraid to tax the rich according to their ability to pay, there is no reason to abstain from any expenditure beneficial to the voters. On the other hand, profits can be freely tapped to raise wage rates and lower prices of consumers' goods.

--Ludwig von Mises, "The Objectives of Economic Education," in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 208-210.

The Assumptions behind John Stuart Mill's Doctrine That Supply Creates Its Own Demand

Keynes, furthermore, ignores entirely the rich, fine work done by such writers as J. B. Clark and the Austrian School, who elaborated the laws of proportionality and equilibrium.

The doctrine that supply creates its own demand, as presented by John Stuart Mill, assumes a proper equilibrium among the different kinds of production, assumes proper terms of exchange (i.e., price relationships) among different kinds of products, assumes proper relations between prices and costs. And the doctrine expects competition and free markets to be the instrumentality by means of which these proportions and price relations will be brought about. The modern version of the doctrine would make explicit certain additional factors. There must be a proper balance in the international balance sheet. If foreign debts are excessive in relation to the volume of foreign trade, grave disorders can come. Moreover, the money and capital markets must be in a state of balance. When there is an excess of bank credit used as a substitute for savings, when bank credit goes in undue amounts into capital uses and speculative uses, impairing the liquidity of bank assets, or when the total volume of money and credit is expanded far beyond the growth of production and trade, disequilibria arise, and, above all, the quality of credit is impaired. Confidence may be suddenly shaken and a countermovement may set in.

With respect to all these points, automatic market forces tend to restore equilibrium in the absence of overwhelming governmental interference.

Keynes has nothing to say in his attack upon the doctrine that supply creates its own demand, in the volume referred to, with respect to these matters.

Indeed, far from considering the intricacies of the interrelations of markets, prices and different kinds of production, Keynes prefers to look at things in block.

--Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (1949; repr., Princeton, NJ: D. Van Nostrand Company, 1965), 392-393.

The "New Economics" (Keynesian Revolution) Has Several Points in Common with Marxian and Russian Socialism

From the foregoing, one may see that Keynesism [sic] has several points in common with Marxian Socialism. Among these are:

1. the theory that the rate of return on investments tends to decline and unemployment tends to increase in a free-enterprise, capitalistic economy;
2. emphasis on the depressing influence of savings in a "mature" capitalistic economy;
3. theories of an irresistible tendency to monopoly, increasing concentration of wealth, and the doom of free markets in free enterprise, or laissez faire;
4. disparagement of individual enterprise and responsibility in favor of government control over savings and provision for old age, unemployment, and other emergencies in an elaborate "social security" program;
5. proposals for "progressive" income and inheritance taxes;
6. proposals for government management of the currency and banking, for government ownership of certain industries; and for liquidation ("euthanasia") of the rentier (bond-holding and fixed-income) classes; 
7. a collectivistic view of property rights as privileges from the State, to be given or taken away at the will of the State;
8. a tendency to identify government with "all of us," or with "society," in the democratic socialist state and in the democratic Keynesian "mixed" economy;
9. a tendency to deal with persons and economic activity in terms of "classes," "averages," "aggregates," and technological or economic "forces";
10. a mechanistic view of human behavior as predictable and controllable by government, through study and manipulation of interest rates, money, government lending and spending, taxation, and technological developments. 

Yet, despite the similarities between Marxian socialism and Keynesism [sic] and despite growing hostility to Russian Marxists, the Keynesian national-income approach makes rapid headway in American colleges and universities. Why?

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 28-30.

Professor Hayek on the Mythology of Capital: The Misleading Concept of Capital as a Definite “Fund” and the Meaningless Abstraction of a Single or Average Period of Production

Professor Knight’s crusade against the concept of the period of investment revives a controversy which attracted much attention thirty and forty years ago but was not satisfactorily settled at that time. In his attack he uses very similar arguments to those which Professor J. B. Clark employed then against Böhm-Bawerk. However, I am not concerned here with a defense of the details of the views of the latter. In my opinion the oversimplified form in which he (and Jevons before him) tried to incorporate the time element into the theory of capital prevented him from cutting himself finally loose from the misleading concept of capital as a definite “fund,” and is largely responsible for much of the confusion which exists on the subject; and I have full sympathy with those who see in the concept of a single or average period of production a meaningless abstraction which has little if any relationship to anything in the real world. But Professor Knight, instead of directing his attack against what is undoubtedly wrong or misleading in the traditional statement of this theory, and trying to put a more appropriate treatment of the time element in its place, seems to me to fall back on the much more serious and dangerous error of its opponents of forty years ago. In the place of at least an attempt of analysis of the real phenomena, he evades the problems by the introduction of a pseudo concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.

--F.A. Hayek, Capital and Interest, ed. Lawrence H. White, vol. 11 of The Collected Works of F.A. Hayek (Chicago: The University of Chicago Press, 2015), 119-120.

"Forced Saving" Occurs When Real Resources Are Transferred (As a Direct Result of Monetary Expansion) from Producing Consumer Goods to Producing Capital Goods

Hayek contested the alleged 'neutrality' of money. Variations in money could instigate change in real economic variables; and Hayek's work emphasises the all-pervasive, short-run effects of changes in the money supply. Wicksell's analysis had ignored those effects, but his introduction of the concept of 'neutral money' itself suggested 'recognition of the fact that money need not be neutral' (Schumpeter). The subsequent search for the conditions in which money is neutral had only one logical outcome: for as soon as a set of conditions is established for ensuring monetary stability, it follows that money itself 'exerts an influence and hence that it is not neutral' (Schumpeter). Hayek emphasised that monetary disturbances affected real sectors of the economy through induced changes in relative prices and interest rates; and he focused upon the mechanism by which these occurred. Central to his analysis is the concept of 'forced saving' which occurs when real resources are transferred (as a direct result of monetary expansion) from the production of consumer goods to the production of capital goods.

--G.R. Steele, Monetarism and the Demise of Keynesian Economics (New York: Palgrave Macmillan, 1989), 32.

Keynesian (So-Called) Full-Employment Policies Are Implausible Because of the Ricardo Effect

In the practical world of business, the function of investment expenditure is to provide the capital necessary to increase the supply of consumption goods in the future. However, Keynes’s General Theory provides a macroeconomic analysis where investment is treated as a component of aggregate demand that may be used to boost employment both directly and indirectly via the multiplier process. In setting aside the functional purpose of investment, to produce a short-run model of employment and national income, Keynesian macroeconomics neglects a hugely important area of economics; that is, the determinants of the changing levels and composition of production through time.

Hayek argues that the strategy of an expansionary monetary policy as the means to reach full employment is explained by Keynes’s ignorance of Austrian capital theory. The successful implementation of roundabout production methods requires a prior provision of resources that is delivered by voluntary saving. Forced saving (which accrues whenever inflated consumption goods’ prices reduce real wages) is not a viable alternative, because the Ricardo effect tells cumulatively against roundabout production methods. The relevance of monetary expansion is clear. A macroeconomic investment boom launched upon the back of monetary expansion is an inevitable failure. Keynesian (so-called) full-employment policies are implausible because of the Ricardo effect.

--G.R. Steele, The Economics of Friedrich Hayek, 2nd ed. (Houndmills, UK: Palgrave Macmillan, 2007), 148-149.

Hayek on Keynes' Fourth Fundamental Error: The Keynesian Philosophy of “In the Long Run, We Are All Dead” Is the Height of Scientific Irresponsibility

The General Theory is a model focused primarily on the short term. Hayek criticized Keynes because, in his opinion, only entrepreneurs have much to say in the short term, and economists do not have much to contribute in this field. In his view, an economist has the privilege and duty to analyze the medium term and long term effects of the economic policies undertaken. For Hayek, the Keynesian philosophy of “in the long run, we are all dead” is the height of scientific irresponsibility, and leads to policies which may give good results in the short term but can be extremely harmful in the long run.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Third Fundamental Error: Keynes' Macroeconomic Approach Hides from Economists the Fundamental Mechanisms of Change in the Market

Keynes’ model is clearly macroeconomic. According to Hayek, though, this approach is wrong, as it hides the fundamental mechanisms of change in the market from the economist. In his view, in order to understand the market process, economists need to study the economy from the point of view of the actors involved. Therefore, the relevant things are relative prices and the investment structure, and not concepts such as aggregate investment or the level of wages. Thus, Keynes’ theory would not be enough to explain the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Second Fundamental Error: Keynes Considers the Market Exclusively As a Set of Monetary Flows

In Hayek’s opinion, Keynes focuses his analysis mainly on the monetary surface of the market process while he neglects analyzing the underlying real process. Hayek believes that Keynes considers the market exclusively as a set of monetary flows and, therefore, in The General Theory everything is explained through the variation of monetary expenditure. For Hayek, this approach to the economic problem makes it impossible to construct theories to understand the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 295.

Hayek on Keynes' First Fundamental Error: Keynes' General Theory Lacks a Theory of Capital and It Suppresses the Production Structure in the Concept of Aggregate Investment

From Hayek’s point of view, the major deficiency in The General Theory is that it is not based on a theory of capital. According to Hayek, the market is a network of millions of companies that complement and coordinate with each other intertemporally and synchronically, forming an extremely complex production structure. In order to understand how and why this structure is coordinated or discoordinated, we need to apply a theory allowing us to study the way it works. However, Keynes does not study this production structure, but suppresses it in the concept of aggregate investment. This is why Hayek thought that Keynes was not able to understand the causes of and the solutions to economic fluctuations.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 294.