Austrian Capital Theory And The Future of Macroeconomics
Richard M. Ebeling, ed.
Austrian Economics: Perspectives on the Past and Prospects
for the Future
Hillsdale, MI: Hillsdale College Press, 1991, pp. 303-324
Roger W. Garrison*
During an early phase in the preparation of this paper, I was invited
to address the Economics Workshop at California State University, Hayward.
I sent a recently completed manuscript entitled "Is Milton Friedman a Keynesian?"
 to be distributed in advance to the workshop's participants. On
reading my answer to this seemingly impish question, Professor Charles
Baird, who was arranging for my visit, advertised the session with a title
of his own choosing: "Keynesianism and Monetarism: Is There a Schilling's
Worth of Difference?" He hoped that he hadn't posed this question too subtly
and that it would be understood that the reference was to the Austrian
Anyone who knows Austrian
macroeconomics will confidently anticipate that Professor Baird's question
was to be answered in the negative. But his allusion to the currency of
Austria inspires a more positive comparison of macroeconomic theories.
If Keynesianism and Monetarism are within a schilling of one another, the
gulf that separates these theories from Austrian macroeconomics is on the
order of a hundred schillings. Attention to the time element in the process
of production and, more specifically, the incorporation of an intertemporal
capital structure are what characterize Austrian macroeconomics and set
it apart from the more widely accepted formulations of macroeconomic relationships.
The hundred-schilling difference that Austrian capital theory makes is
celebrated by Austria's hundred-schilling note, which features none other
than Eugen von Böhm-Bawerk. Never mind that it was his service as
Minister of Finance rather than his authorship of Capital and Interest
that won him such a place of honor.
The hundred-schilling note
can serve modern Austrian macroeconomists as a reminder that the multistage
production process, through which inputs are transformed over time into
consumable outputs, underlies such conventional macroeconomic aggregates
as national income and national output; that the proper management of the schilling
can create conditions for intertemporal coordination and economic growth;
and that mismanagement of the schilling can induce intertemporal discoordination,
economic stagnation, and cyclical patterns of boom and bust. Capital theory,
which owes so much to Böhm-Bawerk, provides the underpinnings for
an Austrian analysis of the economy's performance in both favorable and
unfavorable monetary environments.
A careful assessment of
the more conventional treatment of these Austrian concerns reveals that
capital-based distinctions play a critical role even in theories that do
not openly admit of capital considerations. The fact that such considerations
are only implicit or severely understated has the effect of trivializing
issues that would otherwise take on a significance of the first order.
Identifying what we might call the capital connection that links modern
theories to those based squarely on the contribution of Böhm-Bawerk
will reveal the Austrian alternative to be more straightforward and potentially
As a seemingly benign development
in economic research and in classroom teaching, the issues related to the
economy's overall performance have become highly compartmentalized. A casual
survey of the professional journals and of college textbooks reveals, for
instance, that macroeconomics proper is something distinct from the economics
of growth. And although the analytical tools and policy prescriptions of
textbook macroeconomics are typically presented in the context of an economic
depression, business-cycle theory per se is considered to be a separate
What forces determine the
level of utilization of the economy's productive capacity? What forces
give rise to an increase in the economy's productive capacity? What forces
account for fluctuations in the utilization of—or in the augmentation of—the
economy's productive capacity? Clearly, these questions are closely related;
their common denominator is the economy's productive capacity, which is
to say, its resource base and, more pointedly, its intertemporal capital
But the answers to these
questions as set forth in professional journals and in college textbooks
are not so clearly or closely related. In modern treatments of the economy's
overall performance, the fields of macroeconomics and growth are kept separate
for the sake of manageability or convenience. But the stipulative distinction
that maintains the separation between the two fields obscures the substantive
issues that actually join them. The compartmentalization of topics (macroeconomics
proper, the economics of growth, and business-cycle theory) is attributable
to the fact that the common denominator, particularly the structure of
capital, is but rarely the focus of analysis. Instead, alternative assumptions,
often only implicit, about the capital structure define and delimit each
The assumption of a given
capital structure, for instance, underlies the set of relationships that
constitute macroeconomics proper. The assumption of a uniform growth in
the capital stock underlies a fundamentally different set of relationships
that constitute growth theory. Similarly, a business cycle theory that
allows for actual changes in the capital structure is perceived, on the
basis of the conventional compartmentalization, to be a mislabeled theory
about economic growth.(1) Strictly as a
matter of analytical procedure, then, considerations that maintain a separation
of topics do not become the focus of analysis of any one of the separated
topics. Capital theory, which identifies the economic forces that maintain
the existing capital structure or cause it to change, falls through the
cracks of modern discourse.
Pre-Keynesian Macroeconomics: A Key Classical Insight
The compartmentalizing distinction between macroeconomics and the economics
of growth would have been foreign to economists writing before the Keynesian
Revolution. When Adam Smith inquired into the nature and causes of the
wealth of nations, it did not occur to him to make such a first-order distinction.
The invisible hand that increased wealth was the same invisible hand that
drew an income from that wealth. The principle of self interest leveraged
by the division of labor accounted both for the utilization of existing
capital and for capital accumulation.
The effects of the division
of labor, which Smith spelled out in Book I of the Wealth of Nations,
are reinforced by the effects of the division of stock, which he spelled
out in Book II. His use of the plural "capitals" stands as a reminder that
the stock is not to be viewed as a simple aggregate, and his distinction
between fixed capital (plant and equipment) and circulating capital (goods
in the making and in inventory) call attention to the structure of capital
and, at least implicitly, to the time-consuming production process which
ultimately yields a consumable output.
Central to his analysis
was the distinction between (1) the employment of labor for the provision
of consumable output in the present or immediate future and (2) the employment
of labor for the provision of additional capitals, which facilitate the
production of consumable output in the more remote future. Unfortunately,
Smith made this important distinction by drawing a contrast between "unproductive
labor," which leaves unaltered the economy's capital stock, and "productive
labor," which augments the economy's capital stock. His normative judgment
that favored the sacrifice of present gratification for the sake of future
fulfillment colored his language unduly. The implied superiority of laboring
"productively," as compared to laboring "unproductively," has been the
focus of much criticism and has misled even the most sympathetic interpreters.
Although Smith's choice of terminology is lamentable, his treatment of
these alternative uses of labor should suggest to modern economists that
there are important substantive issues that straddle the fence now separating
macroeconomics and the economics of growth.(2)
In the writings of John
Stuart Mill, Smith's productive and unproductive labor was transformed
into productive and unproductive consumption. The distinction, largely
the same as Smith's, focused attention on the economy's production process
by contrasting consumption activities as they did or did not contribute
to the maintenance or expansion of productive capacity [See Mill, 1895,
pp. 41-48 and Mill, 1974]. A mill worker eating his lunch is engaged in
productive consumption; a mill owner wearing his Sunday finery is engaged
in unproductive consumption. As with Smith's distinction, it is the passage
of time rather than the difference in class that imbues Mill's distinction
with analytical relevance. Sustenance for the mill worker today—and even
more so for the workers constructing a new mill—produces fabrics for tomorrow.
This time element in the
process of production and in the expansion of productive capacity underlies
Mill's fourth fundamental proposition respecting capital that "Demand for
commodities is not demand for labour" [1895, p. 65] If the economy's capital
structure were fixed and not fully utilized, and if today's output were
fully attributable to today's labor, then it would follow trivially that
the demand for commodities is the demand for labor. Or less cryptically:
under such restrictive assumptions, the demand for labor would move in
lockstep with the demand for final output. Mill's rejection of such a simplistic
theory of derived labor demand reflects his concern with the very market
forces that these restrictive assumptions conceal. In fact, all four of
Mill's fundamental propositions reflect his concern with capital theory
and its relevance to what are now considered to be macroeconomic issues.(3)
According to Mill [1895,
p. 65], today's demand for commodities "determines the direction
of labour; but not the more or less of labour itself...." The market forces
that transform a reduction in demand for current output into an increase
in demand for productive capacity and hence an increase in the supply of
future output loosens the link between the current demands for "commodities"
and for "labor." These market forces, whose assumed absence underlie modern
macroeconomics, and whose assumed presence underlie modern growth theory,
are themselves rarely the subject of inquiry. Again, the neglect of important
substantive issues, as summarized by Mill's fourth fundamental proposition,
has become part of the legacy of the modern compartmentalization of topics.
My characterization of the
classical concerns implied by Smith's labor-based distinction and Mill's
consumption-based distinction is not intended to suggest that these classical
insights be grafted onto modern theory or wedged between modern macroeconomics
and the economics of growth. Mill's language, like Smith's, encumbers an
important analytical distinction with strong normative connotations. And
the very term "productive consumption," in the context of modern discourse,
is a term at war with itself. At a given point in time, producing and consuming
are to be taken as alternative activities; over time, the two activities
are to be understood within a means-ends framework. Neither of these relationships
is adequately captured by Mill's language.
Further, the term "productive
consumption" reflects the absence of a well developed theory of capital.
Workers consume in order to be able to produce. Most consumption by workers—all
of it, if wages are at the subsistence level—was considered by the classical
economists as nothing but the maintenance of human capital. David Ricardo
and even Mill often argued as if all capital is—or can be conceptually
reduced to—human capital in the sense of adequately fed workers. To accept
this mode of theorizing is to endorse the wages-fund doctrine in its strictest
sense and to overlook important market forces that govern the use of capital
The fullest appreciation
of the insights of Smith and Mill requires that the basic ideas be stripped
of their normative biases and developed in the context of a more comprehensive
theory of capital. Significant in this respect is the contribution of the
Austrian school and the contrast between the Austrian vision of a capital-using
economy and the alternative vision that provided the basis for the Keynesian
The Austrian Development
In the Austrian formulation, the conception of a capital structure
consisting of many stages of production gives scope to the market forces
that relate current employment of labor to the future output of consumption
goods.(4) While some capital goods are specific
to a particular stage of production, others can be shifted from one stage
to another so as to vary the temporal relationship between labor input
and consumable output. To acknowledge the possibility of such intertemporal
variation is to warn against the simplistic doctrine of derived demand
[Hayek, 1941]. Replacing the judgment of the economist that laboring to
increase productive capacity is preferable to laboring to satisfy consumption
demand more directly with the recognition that market participants themselves
have preferences that relate future consumption to present consumption
rids the classical insight of its normative content. The economics of a
capital-using economy as spelled out by the Austrian school allowed Mill's
fourth fundamental proposition to develop into a comprehensive investigation
of the market forces that tailor intertemporal production processes so
as to match intertemporal consumption preferences.
Demand for commodities is
not demand for labor. In Austrian translation: Changes in the demand for
consumption goods is not accompanied by proportionate changes in the demand
for labor. Rather, a decrease in present consumption demand, for instance,
signifies an increase in savings which, in turn, gives strength to future
consumption demand. The demand for labor does not simply mirror the decrease
in present consumption demand but rather reflects the change in the preferred
intertemporal pattern of consumption. Both labor and non-specific capital
goods are reallocated away from late stages of production that were meeting
demands for present consumption, which are now weakened, and into early
stages of production so as to meet demands for future consumption, which
are now strengthened. The market process that results in such a restructuring
is guided by changes in the prices of consumption goods, capital goods
in each of the stages of production, and labor.
Although there is an adequate
basis, as provided by the Austrian theory of capital and interest, to reject
the simple notion of derived labor demand, there is no simple alternative
notion. A decrease in present consumption demand may signify an increase
in liquidity preference rather than a decrease in time preferences. In
either instance, the corresponding increase in future consumption demand
is necessarily a demand of unspecified dimensions. Just what will be demanded
as well as just when are matters for speculation. The quality of such speculation
affects both the current and the future demand for labor in each of the
stages of production. And further complicating the market process illuminated
by the Austrian school, what appears to be an increase in savings, as gauged
by a decrease in the rate of interest, may instead be the result of monetary
Sorting out the possible
complications in the market process that governs the economy's structure
of production results in a natural blending of macroeconomics, growth theory,
and business-cycle theory. The market process that maintains a particular
structure of production in the face of unchanged intertemporal consumption
preferences is the focus of macroeconomics proper; the (same) market process
that alters the structure of production in response to a shift in intertemporal
consumption preferences is the focus of economic growth; the (similar)
market process through which monetary manipulation induces a temporary
stimulant to economic growth in spite of unchanged intertemporal consumption
preferences is the focus of business-cycle theory. Explicit attention to
the capital structure and its relationship to intertemporal consumption
preferences provides a unification of theories that is absent in the more
conventional formulations in which capital considerations remain suppressed.(5)
The Keynesian Revolution
The vision of a capital-using economy that characterized the Austrian
school gave scope to Mill's fourth fundamental proposition and enriched
its implications. Not so for the alternative vision set forth by Alfred
Marshall and adopted by John Maynard Keynes. In many respects, Marshall's
economics can be considered a synthesis of classical and Austrian insights,
but in the context of the present paper, his perspective on capital and
time stands in contrast to the treatment we have traced from Smith to Mill
to the Austrians. And the contrast of visions is sharpened when Marshall's
comparative neglect of the intertemporal structure of capital and its relationship
to intertemporal consumption preferences is taken to the limit by Keynes
in his General Theory.
In Keynes's critical Chapter
4, "The Choice of Units," a chapter misleadingly billed by Keynes as a
digression, a number of terms are defined and assumptions invoked. In choosing
his units, Keynes, in effect, chooses to ignore all the issues that give
meaning to Mill's fourth fundamental proposition. The structure of production,
defined as the distribution of capital among industries rather than among
stages of production, is assumed to be fixed [Keynes, 1964, p. 45]. So
too is the distribution of the total wage bill among different kinds and
grades of labor [Ibid., p. 41]. The labor-unit, as a matter of definition,
faithfully measures the level of employment of a given distribution. And
with the wage-unit set by accident of history, changes in total employment
are directly proportional to the changes in the total wage bill.
What we might call Keynes's
fundamental proposition of Chapter 4 is the negation of Mill's fourth fundamental
proposition: The demand for final output is the demand for labor. The demand
for labor (more specifically, the quantity of labor demanded at a fixed
wage rate) moves in lockstep with the demand for final output.(6)
This proposition, which is the essence of Keynes's Chapter 4, is what allows
the focus of analysis to be shifted away from the issues that were of interest
to Classical and Austrian economists and towards the one live issue that
survived Keynes's simplifications, namely, the determinants of the absolute
magnitude of aggregate demand.(7)
Keynesian theory is unable
to deal with distinctions between productive and unproductive activities
in the sense of Smith or Mill or between production aimed at satisfying
near-future demands and production aimed at satisfying remote-future demands
in the sense of the Austrians. The significance of such distinctions having
been nullified by assumption, the one distinction that takes on near-exclusive
significance in Keynesian theory is that between demand that varies (directly)
with income and demand that is independent of income. In broad application,
income-induced consumption demand lies on one side of the distinction while
the other side consists of so-called autonomous consumption demand, as
well as investment demand and government spending, both of which are taken
to be autonomous in that they do not depend in any direct or fundamental
way upon current income.
In principle, the components
of autonomous demand can change. In practice, the first component, autonomous
consumption demand, remains virtually constant; the second component, investment
demand, changes erratically on the basis of the changing psychology of
the business community; and the third component, government spending, can
be varied by policymakers so as to induce changes in income. This characterization
of the components of aggregate demand gives rise to a vision of the economy
in which consumption demand (both autonomous and income-induced components)
is stable; investment demand is unstable; and government spending is stabilizing—all
in the context of a fixed capital structure.
The Keynesian vision of
the economy can be expressed as a corollary of the fundamental proposition
of Chapter 4 and in a way that provides a contrast to the alternative visions
of Mill and the Austrians. An increased demand for private or public investment
goods is an increased demand for labor, which is, as a result
of the income paid to the workers directly employed, an increased demand
for consumption goods, which is, in turn, a further increased demand
for labor, which is.... Consumption demand and income continue to
reinforce one another in successive rounds of spending and earning, each
round slightly weaker than the one before. The final result is that all
of the magnitudes involved in the adjustment process (investment, income,
and consumption spending) are higher than before with the change in the
income-induced component of aggregate demand standing in direct proportion
to the change in the autonomous component.
All this is standard material
in the typical sophomore level course in macroeconomics, as is the listing
of pre-existing conditions that establish the context for the Keynesian
multiplier process. The economy must be operating below its potential.
There is "involuntary" unemployment in all labor markets and resource idleness
or excess inventories in all other markets. Wage rates and resource prices
are stuck at levels too high for market clearing.
Under such conditions, which
in the absence of some extra-market force would imply a persistence of
idle workers and idle resources, it is possible for all macroeconomic magnitudes,
except for aggregate idleness, to be moved upward together. More investment
is accompanied by more consumption, both at the expense of worker and resource
idleness, which is to say, at no expense at all. But trading idleness for
investment goods and consumption goods has its limits. The multiplier process
ceases to work when aggregate demand is sufficient to achieve a state of
Keynesian Theory and Classical/Monetarist Concerns
It is at the limits set by full employment that, even according to
Keynes [1964, p.378], "the classical theory comes into its own." This notion
appears in modern textbooks as a recognition that when aggregate demand
increases beyond the level required to maintain full employment, prices
and wages rise. In its extreme form the Keynesian-Classical/Monetarist
synthesis is depicted as an L-shaped aggregate supply curve, actually a
backwards L, whose horizontal segment represents a less-than-fully employed
economy and the applicability of Keynesian theory, and whose vertical segment
represents a fully employed economy and the applicability of the quantity
theory of money. As the aggregate demand curve sweeps outward across the
horizontal portion of the L, employment and output rise, while wages and
prices remain unchanged; as the aggregate demand curve sweeps upward across
the vertical portion of the L, wages and prices rise, while employment
and output remain unchanged.
In a bow to reality, it
is generally acknowledged that prices and wages will begin to rise before
the economy has actually achieved full employment, as evidenced by A. W.
Phillips's empirical study and as explained in Keynes's discussion of "bottlenecks"
[Ibid., p. 300], a term which suggests that some sectors reach capacity
before others. The sharp corner of the L-shaped aggregate supply curve
is rounded off.
This formulation lends itself
to a seemingly balanced textbook presentation in which the extreme Keynesian
case and the extreme Classical/Monetarist case define the limits of possible
consequences of an increase in aggregate demand. The intermediate case,
of course, lies somewhere between the extremes and allows for an increase
in aggregate demand to have an effect on wages and prices as well as on
employment and output. A textbook presentation can take on a Keynesian
or a Monetarist slant through the emphasis of one effect over the other.
A Keynesian presentation deals with situations in which the economy is
far from full employment, focuses on the short run, and shows how appropriate
discretionary monetary and fiscal policies can improve the economy's performance.
A Monetarist presentation deals with situations in which the economy is
close to full employment, focuses on the long run, and casts doubts upon
the possibility that monetary and fiscal activism can improve the economy's
Keynesian Theory and Classical/Austrian Concerns
Left out of the balance in textbook presentations is the Classical
concern as expressed by Smith and Mill and as developed by the Austrians.
Short of full employment, idleness is traded for more investment and more
consumption. At full employment, there is no idleness to trade. Additional
investment must come at the expense of consumption, additional consumption
at the expense of investment. Alternatively stated, investment and consumption
can and do move in the same direction in the Keynesian formulation but
must move in opposite directions in the Classical/Austrian formulation.
This shift from a direct to an inverse relationship in movements of these
two magnitudes is no part of the balance between Keynesianism and Monetarism.
Instead, the synthesized view has it that short of full employment, the
two magnitudes move together in both nominal and real terms; beyond full
employment, they move together in nominal terms only.
Even the most balanced textbook
treatment of macroeconomic issues rules out the possibility of increased
investment at the expense of consumption because to consider that trade-off
is to leave macroeconomics proper and enter the economics of growth. The
compartmentalization that maintains a separation between these two subject
areas has allowed issues concerning this particular trade-off, which has
much greater significance in the Austrian formulation than the trade-off
depicted by the Phillips curve, to fall through the cracks.
In reality, the market forces
that bring labor and other resources out of idleness are intertwined with
the market forces that determine the level of investment relative to consumption
and that allocate labor and other resources among the stages of production.
Policies aimed at expediting the reduction in unemployment and resource
idleness inevitably affect the intertemporal allocation of labor and other
resources. It is inadvisable, then, simply to assume a fixed structure
of capital as the basis for analyzing these market forces and for prescribing
Both the Phillips curve
and the aggregate supply curve, which are commonly used to bridge the gap
between the Keynesian vision and the Classical/Monetarist vision and to
reconcile apparent conflicts over issues of unemployment and inflation,
relate changes in real magnitudes to changes in nominal magnitudes for
different levels of employment. It is tempting to introduce another curve
(although a simple curve would hardly do) that relates (the intertemporal
pattern of) investment to (the intertemporal pattern of) consumption at
different levels of resource idleness.(9)
At one (Keynesian) extreme, the curve would show that at high levels of
resource idleness, investment can increase without drawing resources away
from consumption. At the other (Classical/Austrian) extreme, it would show
that at low levels of resource idleness, investment can increase only
by drawing resources away from consumption. At intermediate levels of resource
idleness, both Keynesian and Austrian market forces are at work, and at
all levels of resource idleness, the particular intertemporal pattern of
investment reflects entrepreneurial expectations about future market conditions
as affected both by market participants and by policy makers.
Complexities inherent in
the Austrian notion of an intertemporal pattern of investment preclude
any simple analytical device comparable to the Phillips curve. Further,
those same complexities suggest that any analytical bridge between the
Keynesian and the Classical/Austrian visions is also a bridge between macroeconomics
proper and the economics of growth. In view of the compartmentalization
of subject areas, any such passable bridge between them would, in all likelihood,
be more complex than either of the separate subject areas. The insights
that could be obtained by constructing such a bridge might be obtained
more easily and more straightforwardly by a wholesale reconstruction of
macroeconomics, a reconstruction that rejects from the outset the compartmentalization
of such eminently related subject areas.
Toward a Unified Macroeconomics
Decompartmentalization does not mean that we should never analyze anything
without analyzing everything. It means that we should organize the subject
matter in such a way that important issues do not fall through the cracks
of our organization scheme. The concept of coordination can serve as the
organizing principle. This concept is generally recognized as serving the
similar purpose of linking macroeconomics to microeconomics. The concept
of coordination, as applied to the individual market participants, as applied
to the buyers and sellers in individual markets, and as applied to the
relationships among markets, provides the microeconomic foundation for
macroeconomics. Accordingly, detailing the market processes that achieve
macroeconomic coordination or identifying instances of coordination failure
must be squared with our understanding of coordination in the context of
Use of the concept of coordination
as an organizing principle deserves to be extended. The notion of intertemporal
coordination gives play to the Classical/Austrian vision of a capital-using
economy. The market forces through which intertemporal production activities
are—or, at least, might conceivably be—kept in coordination with intertemporal
consumption preferences can serve as the focus of macroeconomics in the
broadest sense. As a starting point, it can be recognized, following Keynes,
that at full employment, the Classical/Austrian theory "comes into its
own." But the market forces identified by that theory are at work at all
levels of employment. Under conditions of economywide unemployment and
resource idleness, the strength and direction of these forces may well
be modified, but they would not simply put themselves in abeyance until
some extra-market force eliminated the idleness.
The market forces that adjust—or,
at least, might conceivably adjust—intertemporal production activities
in response to an economywide change in intertemporal consumption
preferences can serve as the focus of the theory of economic growth. The
market forces, of course, are essentially the same for growth and for macroeconomics
more narrowly conceived. The economics of growth deals with the special
case in which there is a general shift in consumer preferences away from
consumption in the present and near future and toward consumption in the
more remote future. Such a shift in preferences requires systematic changes
in intertemporal production activities. Again, the Classical/Austrian theory
would have its most straightforward application if the shift in preferences
occurred under conditions of full employment and a given technology. But
its applicability can be extended, although in some modified form, when
conditions of unemployment and resource idleness prevail or when the preference
shift is accompanied by—or possibly provoked by—technological change.
Under the proposed organization
scheme for macroeconomic topics, the theory of the business cycle falls
neatly into place. If the general theme is intertemporal coordination,
then business cycles can be thought of as particular instances of intertemporal
Artificial booms are instances in which market forces normally associated
with economic growth are set in motion in the absence of any shift in intertemporal
consumption preferences. The applicability of Austrian business-cycle theory,
which suggests that artificial booms and consequent busts are the result
of credit expansion, is not confined to initial conditions of full employment.
Keynes [1964, p. 329] could make no sense at all of the Austrian theory
as applied to conditions of economywide unemployment. He was unable to
find any artificiality in a credit driven recovery because he had
assumed, in effect, that all market forces that come into their
own at full employment were fully suspended during the recovery.
Rejecting this strong assumption allows for a direct confrontation between
Classical/Austrian theory and Keynesian theory while maintaining an essential
unity of macroeconomics, growth theory and the theory of the business cycle.
* The author thanks the participants in Hillsdale's Ludwig
von Mises Lecture Series of 1990 for their valuable comments. Particularly
helpful were Peter Lewin, Joe Salerno, George Selgin, and Larry White.
Comments from Parth Shah of Auburn University and Sven Thommesen of UCLA
are also gratefully acknowledged.
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1. It is argued by Garrison [1989,
p. 16] that John Hicks  so misperceived Hayek. For an early recognition
of such undue compartmentalization, see Lachmann [1978, p. 112].
2. For an Austrian perspective on Smith's
distinction between productive and unproductive labor, see Garrison .
3. The first three of Mill's "fundamental
propositions respecting capital" are not as cryptic or controversial as
the fourth: 1. Industry is limited by capital [p. 54], 2. Capital is derived
from saving [p. 58], and 3. Capital, the result of saving, is nevertheless
consumed (by the workers it employs) [p. 59]. Reflection on the four fundamental
propositions in the context on modern macroeconomics suggests that the
triteness of the first three as well as the mysteriousness of the fourth
are attributable to the absence of an intertemporal capital structure in
modern macroeconomic theorizing. Thompson  assesses several different
interpretations of Mill's fourth fundamental proposition but favors one
that gives play to Austrian capital theory; O'Driscoll [1977, pp. 122-26]
discusses Mill's fourth fundamental proposition in the context of the Ricardo
Effect as incorporated into the Austrian theory of the trade cycle by Hayek.
4. The development of capital theory
in the tradition of Böhm-Bawerk is largely attributable to Mises 
and Hayek . See Garrison  for an exposition of the Austrian
theory of a capital-using economy and a comparison with related theories.
5. To identify the capital structure
as the basis for a unification, or a natural blending, of otherwise separate
theories is not to suggest that any issue not directly related to capital
theory is outside the scope of the unified, or blended, theory. Elsewhere
in this volume, George Selgin deals with the supply of and demand for money
under alternative monetary arrangements. In effect, his concern is with
the ability of the market to translate (intertemporal) consumer preferences
into (intertemporal) production activities in the face of a changing supply
of and/or demand for money—a concern that clearly falls within the scope
of macroeconomics suggested here.
6. It should be noted that the meaning
of the term "final output" underwent a substantial change as the Keynesian
Revolution pushed capital theory out of macroeconomics. Before Keynes,
final output could only mean the consumable output that emerged from the
time-consuming, capital-using production process. After Keynes, all notions
of production time were abandoned in favor of the arbitrary accounting
period. Final output now refers to both consumption goods and investment
goods produced during the period. The adjective "final" serves only to
warn against counting anything twice: Don't count the bread and
the flour that went into its making; don't count the hydraulic press and
the steel that went into its making. But both the bread and the hydraulic
press, so long as they are produced anew in the same accounting period,
are taken to be final output.
7. To take the determinants of aggregate
demand as the major issue in Keynesian macroeconomics is to accept the
common textbook interpretation of Keynes's General Theory. There
are two justifications for taking this approach. First, many of Keynes's
arguments throughout his book fit neatly into the textbook interpretation
[See Yeager, 1973]. Secondly, the assumptions in Keynes's Chapter 4, which
facilitate the most direct comparison with the Classical/Austrian alternative,
are the key assumptions underlying the income-expenditure analysis of modern
8. In Part II of his title essay, "Profits,
Interest and Investment," Hayek  shows how the market process that
governs intertemporal allocation of resources as conceived by the Austrians
plays off against the multiplier process as popularized by Keynes. The
idea that both processes are simultaneously at work is the basis for the
argument in Garrison .
9. The most abstract and highly simplified
treatment of these complexities takes the form of Hayekian triangles as
introduced by Hayek in his Prices and Production . Bellante
and Garrison  compare Hayekian triangles and Phillips Curves as alternative
approaches to dealing with monetary dynamics. Skousen  deals with
capital complexities in terms of aggregate supply and demand vectors, an
analytical device that incorporates the time element in the production
process into the notions of aggregate supply and aggregate demand.