Monetarists Have Effectively Countered Keynesians on Many Fronts, but They Both Ignore a Capital Structure in Macroeconomics and Business Cycle Theory

A stocktaking of the modern alternatives to the Austrian theory suggests that capital-based macroeconomics may be due for a comeback. Conventional Keynesianism, whether in the guise of the principles-level Keynesian cross, the intermediate IS-LM, or the advanced AS/AD is formulated at a level of aggregation too high to bring the cyclical quality of boom and bust into full view. Worse, the development of these tools of analysis in the hands of the modern textbook industry has involved a serious sacrifice of substance in favor of pedagogy. Students are taught about the supply and demand curves that represent the market for a particular good or service, such as hamburgers or haircuts. Then they are led into the macroeconomic issues by the application of similar-looking supply and demand curves to the economy as a whole. the transition to aggregate supply and aggregate demand, which is made to look deceptively simple, hides all the fundamental differences between microeconomic issues and macroeconomic issues. While these macroeconomic aggregates continue to be presented to college undergraduates, they have fallen into disrepute outside the classroom. One recent reconsideration of the macroeconomic stories told to students identifies fundamental inconsistencies in AS/AD analysis.

Conventional monetarism employs a level of aggregation as high as, if not higher than, that employed by Keynesianism. While Milton Friedman is to be credited with having persuaded the economics profession--and much of the general citizenry--of the strong relationship between the supply of money and the general level of prices, his monetarism adds little to our understanding of the relationship between boom and bust. The monetarists have effectively countered the Keynesians on many fronts, but they share with them the belief that macroeconomics and even business cycle theory can safely ignore all considerations of capital structure.

--Roger W. Garrison, "Introduction: The Austrian Theory in Perspective," in The Austrian Theory of the Trade Cycle and Other Essays, ed. Richard M. Ebeling (Auburn, AL: Ludwig von Mises Institute, 1996), 21-23.