Journal of Macroeconomics
vol. 6, no. 2, 1984, pp. 197-213
Time and Money: The Universals of Macroeconomic Theorizing
Roger W. Garrison
A broad overview of the macroeconomic literature suggests that two
objects of economizing behavior, time and money, are the universals, or
common denominators, of macroeconomic theory. Explicit recognition of these
universals allows for a fruitful comparison of Keynesians and Monetarists.
The former tend to deny the possibility of a market solution to macroeconomic
problems, while the latter tend to deny the problems themselves. Austrian
macroeconomics, which consists of an integration of capital theory and
monetary theory and lies between these two extreme positions, is used to
assess recent developments in the mainstreams of macroeconomics.
This paper suggests that macroeconomic propositions should be anchored
in economizing behavior related to time and money, and that macromaladies
stem from ways in which time and money interact in a market economy. Section
2 makes the case for according special status to the "market for time"
and the "market for money" in macroeconomic theorizing. Section 3 argues
that markets for capital goods, which serve as the focus of Austrian macroeconomics,(1)
are the most direct and concrete manifestation of intertemporal markets.
Section 4 introduces money as a 'loose joint" in the market mechanism,
This Hayekian imagery allows for a fruitful comparison of Keynesians and
Monetarists. Section 5 shows that these two mainstream views represent
polar positions and that the Hayekian view, because of its particular treatment
of time and money, represents the middle ground. Section 6 provides an
elaboration of the Hayekian, or Austrian, view, and identifies its theoretical
advantages. Section 7 considers related developments in the mainstreams,
and Section 8 offers a summary and conclusion.
2. The Universals of Macroeconomic Theorizing
Much has been written about the need for a microeconomic foundation
for macroeconomic theorizing.(2) There has
been little effort, though, to identify just what it is that sits on this
foundation. Interpreting the prefix "macro-" to mean economywide suggests
the need to identify economizing behavior whose effects are economywide
in some special sense. The Walrasian insight that everything depends upon
and influences everything else is a reminder of how encompassing the notion
of economywide can be. But the attempt of market participants to economize
on time and on money and the economywide consequences of this economizing
behavior have a special claim on our attention. It is argued below that
the "market for time" and the "market for money" both in their conceptual
isolation and in their actual interaction, give rise to all the phenomena
that are conventionally regarded as macroeconomic in nature.
The most explicit recognition
of the universal nature of time in economic theory is found in the writings
of the Austrian school.(3) All choices are
made with an eye to the future, and all actions take place in time. While
there is no market for time as such, the time element is inextricably wedded
to every market that does exist. The analysis of a market economy consists
of identifying actions of individuals that give rise to various market
phenomena, and time, literally, is the medium through which these actions
The common practice in microeconomics,
particularly in Walrasian general-equilibrium theory, of limiting the subject
matter to the case of a pure exchange economy is an attempt to abstract
from the time element. The simple act of exchange can be conceptually collapsed
into a single instant of time without any serious distortion. But the (timeless)
models which consist of nothing but various constellations of such exchanges
bear little resemblance to the economy being modeled.(4)
In modern market economies the more relevant—and troublesome—considerations
of time are associated not with pure exchange but with production. Acts
of production, though, cannot be conceptually collapsed into a single instant
of time without negating an essential aspect of all production processes.
Explicit attention to the
time element associated with production decisions and production processes
can serve to distinguish macroeconomic theory from conventional general-equilibrium
theory and to give the theory its distinct macroeconomic flavor. Considerations
of time may enter the theory by way of the cost of information about an
uncertain future (as in the Chicago-UCLA tradition), the sluggishness of
money wages or prices (as in the Keynesian approach), or the capital structure
(as emphasized by the Austrian school). In any case the intertemporal relationships
among individual choices in a production economy is the stuff of which
macroeconomic theory is made. Alternative macroeconomic theories, whatever
their particulars, consist of different explanations of the behavior of
individuals in their attempt to "defeat the dark forces of time and ignorance
which envelop our future."(5) But further
inquiry into the particulars of intertemporal markets must await a brief
discussion of the second universal of macroeconomic theorizing.
Though it may be thought
unnecessary to argue the centrality of money in macroeconomic theory, it
is worthwhile to consider the special sense in which money is an economywide
phenomenon. Monetary theorists have long recognized that "money has no
market of its own."(6) It is the obverse
of this truth that highlights the macroeconomic character of money. With
trivial exceptions every market is a market for money. In a modern economy
every exchange involves some specific quantity of money. That this fact
should be the focus of our attention has been recognized by economists
both new and old.(7) There is no denying,
of course, that money serves several functions, as listed in any principles
text, but the presence of money on one side of each exchange in every market
is the special sense in which money is an economywide phenomenon.
The particular reason that
money is singled out for special attention is not just a matter for idle
reflection. It has important implications about the particular way that
money is to enter into a satisfactory macroeconomic theory. As with the
treatment of the time element, the way that money is introduced—e.g., as
a non-interest-bearing asset, as a hedge against rising interest rates,
or as the medium of exchange—accounts for many of the major differences
between competing theories. And the role that money plays in a given macroeconomic
model provides clues about the model's ability to explain macroeconomics
Time is the medium of action;
money is the medium of exchange. Together these two media can serve to
define macroeconomics. If the intertemporal exchanges and the interpersonal
exchanges in a market economy could be isolated one from the other, conventional
macroeconomics would be largely redundant. Cambridge capital theory (which
abstracts from interpersonal exchanges) coupled with Walrasian general-equilibrium
theory (which abstracts from intertemporal exchanges) would adequately
cover the field. The fact that these two categories of economic theory,
taken together, shed no light whatever on the conventional macroeconomic
issues is evidence of the extent to which intertemporal exchanges and interpersonal
exchanges are in fact intertwined. And it is precisely the intersection
of the "market for time" and the "market for money" that constitutes macroeconomics'
unique subject matter.
3. Capital and Time
Economics in general is concerned with the allocation of resources.
Thus, the most general and direct way of dealing with the time element
is to focus on those resources that bear a distinct intertemporal relationship
with one another in the minds of market participants. We have it from William
Stanley Jevons (1970, p. 226) that "the single and all-important function
of capital is to enable the laborer to await the result of any long-lasting
work—to put an interval between the beginning and the end of enterprise."
Jevons is suggesting that one way of concretizing the notion of the "market
for time" is to recognize the essential temporal aspect of the market for
capital goods broadly conceived. Again, the most explicit effort to intertemporalize
economic theory by focusing on capital goods and to build a macroeconomic
theory on a foundation of capital theory is found in the Austrian school.
Menger (1970, pp. 149-174) introduced the idea of "goods of various orders"
where order denotes a temporal relationship between a capital good and
the eventual consumer good that this piece of capital helps to produce.
Böhm-Bawerk (1959, vol. 2, pp. 102-118) provided a description of
what goes on during the interval of time referred to by Jevons and how
the assortment of capital goods must be restructured if that interval is
to be shortened or lengthened. This early work of capital theory provided
a foundation for later developments by Mises (1953, pp. 339-366; 1966,
pp. 538-586), Hayek (1967, pp. 69-100; 1979, pp. 139-192), and others writing
in the Austrian tradition.
In the 1930s this direct
and general approach to dealing with the problem of intertemporal coordination
had to compete with the Keynesian revolution. It would be constructive
if the Austrian formulation of capital theory could be compared to an alternative
formulation offered by Keynes. But this is not possible. Keynes (1964,
pp. 213-217) dismissed the contribution of Böhm-Bawerk out of hand
but offered no alternative of his own.(8)
The objective instead, was to press on with macroeconomic theory in the
absence of any underlying theory of capital The effect of Keynes's contribution
is neatly summarized by Axel Leijonhufvud (1968, p. 212)
The theory of capital and interest was the subject of
great debate in the early thirties.... [But the] issues were not resolved.
Keynes's General Theory had the effect of cutting the debate short.
The capital-theoretic controversies were buried under an avalanche of pro-,
anti-, and (soon enough) post-Keynesian writings, and the issues were to
remain in abeyance for some twenty years.
Thus, Keynesianism represents an emancipation of macroeconomic thought
from the thorny issues of capital theory, but it also represents the abandonment
of the most direct approach for dealing with the element of time.
It is not argued here that
Keynes eliminated the time element from his theory. To the contrary, considerations
of time loom large throughout the entire book. But to account for the particular
ways in which time is taken into consideration would embroil us in controversies
that are yet to be resolved forty-odd years after the book's publication.
Most significant is the very lack of any such resolution. In the relevant
passages discussions of capital goods or the capital structure seem to
be replaced by allusions to "casinos" and "musical chairs" (1964, pp. 156,
159). Some kind of speculation about the future is necessitated by his
theory, but when the "animal spirits (1964, pp. 161) of Keynesian investors
are pitted against the "dark forces of time and ignorance," the dark forces
seem always to win out. This characteristic of Keynesian theory follows
directly from the rejection of the capital theory that had served in pre-Keynesian
formulations as the embodiment of the "market for time."
4. Money as a "Loose Joint"
Intertemporal market forces find their most direct and concrete expression
in the market for capital goods. If capital goods were traded directly
for consumer goods or for other capital goods, the nature of macroeconomics
would be substantially different from what it is. The fact that capital
goods and the corresponding consumer goods are traded indirectly via the
medium of exchange adds the other essential dimension. Macroeconomic theory,
then, should highlight the implications of indirect exchange in the context
of a capital-using economy.
In the closing pages of
Pure Theory of Capital (1941, pp. 408-410), Hayek provides a piece
of imagery that hints about how the "pure theory" might be qualified with
monetary considerations. Money is conceived as the "loose joint" in the
self-equilibrating market system. The fact that money is a joint
linking the ability to demand with the willingness to supply gives meaning
to Say's Law correctly understood. The fact that the joint is a loose
one keeps Say's Law from being true in the vulgar sense. The play in the
system associated with the use of money allows for deviations between the
quantities of nonmonetary goods supplied and the quantities demanded. Recognizing
money as the loose joint in the context of a capital-using economy focuses
attention on the looseness between the supply of an assortment of capital
goods and the subsequent demand for the corresponding consumer goods. It
is this looseness that gives rise to the most common macroemaladies, such
as "overinvestment," or what the Austrian writers call "malinvestment."
(More on these phenomena later).
Many macroeconomic theories
accord money a central role. Hayek's imagery provides an acid test for
the adequacy of these theories. The conception of money as a loose joint
suggests that there are two extreme theoretical constructs to be avoided.
To introduce money as a "tight joint" would be to deny the special problem
of intertemporal coordination. Macroeconomic models with tight-jointed
money serve to collapse all exchanges, whether intertemporal or atemporal,
into a timeless general equilibrium framework. At the other extreme, to
introduce money as a "broken joint" would be to deny even the possibility
of a market solution to the problem of intertemporal coordination. In a
world of broken Jointed money, prices could not conceivably transmit information
about the desired allocation of resources over time or provide the correct
incentives for such a desired allocation to be actualized. In short, the
concepts of tight-jointed money and broken-jointed money serve to deny,
respectively, the central macroeconomic problem and its solution. It will
be argued below that the mainstreams of macroeconomic thought, Monetarism
and Keynesianism, have tended to adopt one of the two polar positions with
the result that, as a first approximation, macroeconomic problems are seen
to be either trivial or insoluble. Between theses extreme conceptions is
Hayek's notion of loose-jointed money, which serves to recognize the problem
while leaving the possibility of a market solution to it an open question.(9)
5. The Mainstreams of Macroeconomics
That the monetary mechanism is an essentially loose one is precisely
the fact that is ignored in one of the two mainstream views. It may be
instructive to consider the writings of Knut Wicksell (1936, pp. 122-156)
as an early example of tight jointed macroeconomic models. Wicksell's formulation
is singled out because of its praiseworthiness on other counts. It incorporates
a modified version of Böhm-Bawerk's capital theory and thus takes
due account of the time dimension of economic activities. And his formulation
squares with the ultimate truth of the quantity theory. But while Wicksell
is generally credited with having integrated monetary theory and value
theory, this is precisely what he did not do.(10)
His model was so constructed that, in the simplest case, all prices, driven
by the real-cash-balance effect, moved up and down together. In instances
when it was recognized that some prices may (temporarily) increase more
than others, no corresponding quantity changes were allowed. The result
was that the Wicksellian model obscured all the ways in which the "market
for money" and markets for capital goods interact and focused instead on
the relationship between the total quantity of money and the general level
of prices.(11) But, of course, a theory
that truly integrated monetary theory and value theory would have to focus
on those very interactions that Wicksell's formulation assumed away.
Modern developers of Wicksell's
formulation have recognized that the real-cash-balance effect is the only
link in that formulation between the real and the monetary factors. Even
though the equilibrating forces were originally described in the context
of a quasi-Böhm-Bawerkian capital structure, the monetary forces were
never allowed to impinge on the intertemporal relationships reflected in
the existing structure of capital goods. Monetary considerations and value
consideration were kept segregated by the assumption—sometimes explicit,
sometimes implicit—of tight jointed money. And it is precisely this segregation
of monetary and value theory that allows modern theorists, such as Don
Patinkin (1965, pp. 199-213), to replace the complex intertemporal structure
of production and its output with a single aggregate labeled "commodities."
Simplifying the formulation in this way transforms the assumption of tight-jointed
money into the equivalent assumption that nothing of relevance to macroeconomics
is taking place within the commodities aggregate. Clearly, those who see
loose-jointed money as the ultimate source of all the troublesome macroeconomic
phenomena will see that Patinkin's analysis is trivial in this context.(12)
While the notion of tight-jointed
money trivializes macroeconomic problems, the opposing notion of money
as a broken joint renders them insoluble. This opposing polar assumption,
however, lies at the root of the second mainstream. Keynes denied the applicability
of Say's Law to a monetary economy and chided his contemporaries for "fallaciously
supposing that there is a nexus which unites decisions to abstain from
present consumption with decisions to provide for future consumption..."(1964,
p. 21). Keynes saw the money rate of interest, which his contemporaries
took to be a loose intertemporal link, as a "current phenomenon" (1964,
p. 146). The perceived absence of any mechanism in a monetary economy which
could conceivably achieve intertemporal coordination of economic activities
explains how Keynes could summarily dismiss the theory of capital devised
by Böhm-Bawerk without seeing the need to replace it with some other
comprehensive view of capital. The relationships between the various elements
of the capital structure were simply no part of his theory. Instead, it
was only by "accident or design" (1964, p. 28)—as opposed to the outcome
of an undesigned order—that the economy achieved macroeconomic coordination.
That is, with the assumption that money constitutes a broken joint, a market
solution to macroeconomic problems is beyond the pale.
Viewed from this perspective
the macroeconomic theory offered by Hayek and other members of the Austrian
school represents a middle-ground position.(13)
At the same time it constitutes a radical position—radical in the sense
of going to the root of the matter. The following section provides a broad
outline of the Austrian view and the penultimate section evaluates some
modern advancements in mainstream views in the light of this outline.
6. Austrian Macroeconomics
As was noted earlier, indirect exchange in a pure exchange economy
allows for some discrepancies—some looseness—between the supply of goods
and the demand for goods. But excess supplies and demands in such an economy
are simple in nature and can be eliminated in a relatively painless way
through simple price changes that alter relative prices and possibly the
general price level as well. Apart from adjustments in real cash balances,
the market process in a pure exchange economy is of very little interest
The implications of a loose
monetary joint grow in complexity when the setting is generalized to allow
for goods of various orders—to use the Mengerian terminology. The constellation
of capital goods that facilitate production is the embodiment of the time
element in the production process. In this setting the availability of
the goods that characterized the pure exchange economy is preceded by as
sequence of exchanges of goods of "higher order"—plant and equipment, raw
materials, goods in process. This sequence of exchanges gives leverage
to the looseness of the monetary joint. For example, an excess of higher-order
goods that are several steps removed from the emergence of consumer goods
(e.g. lumber destined for use in the construction industry) may not be
seen immediately as an excess at all. Such a perception depends critically
on entrepreneurial forecasts of future consumer demand. And erroneous forecast
may not be revealed before the creation of corresponding excesses in the
subsequent stages of the production process. But in accordance with Say's
Law, the excesses will eventually reveal themselves. Although the revelations
could take any of a number of forms, in the Austrian literature it usually
takes the form of a (relative) shortfall of capital goods needed to complete
the production process.(14) This particular
scenario emphasizes the notion of intertemporal complementarity among different
kinds (orders) of capital goods. The significant point is that the excess
supplies and demands, once revealed, are not remedied in any simple manner.
The necessary adjustments may involve a fundamental restructuring of the
economy's production process. The looseness of the monetary joint, in effect,
has allowed for a certain amount of intertemporal discoordination to go
unperceived for a period of time. The resulting "malinvestment" consists
of an overinvestment of some kinds of capital (typically, long-term capital
goods) and an underinvestment of other kinds (typically, short-term goods).
Not surprisingly, the market process that corrects for this economywide
malinvestment can be a long and painful one. The looseness of the monetary
joint that allows discoordination to arise in the first place precludes
a quick and painless remedy.
The Hayekian theory contains
an implicit criticism of practically all mainstream theories. It warns
against making a stipulative distinction between structural unemployment
and cyclical unemployment. The mainstream approach is to abstract from
the structural component of unemployment in order to focus more clearly
on the cyclical component; the Austrian approach recognizes that cyclical
unemployment can arise from a discoordinated capital structure.(15)
Further, the Austrian view
has clear implications about the broadly conceived goals of macroeconomic
policy. Policymakers should recognize that inherent looseness in the system
and should abstain from any actions that would further weaken the loose
joint or render the inherent looseness more difficult to deal with. Space
does not permit a full consideration of alternative policy schemes, but
there is room for a broad generalization. The conceptualization of money
as a loose joint strengthens our intuition that discretionary policy is
likely to exacerbate the problems that stem from the loose-jointedness
of the system. Hayek (1941, p. 408) issued an early warning against such
[M]oney by its very nature constitutes a kind of loose
joint in the self-equilibration apparatus of the price mechanism which
is bound to impede its working—the more so the greater the play in the
loose joint. But the existence of such a loose joint is no justification
for concentrating attention on that looseness and still less for making
the greatest possible use of the short-lived freedom from economic necessity
which the existence of the loose joint permits.
This passage captures the flavor of modern writings within Austrian tradition
and anticipates in a significant way the essential aspect of many modern
developments. The Hayekian view is consistent with the Public-Choice view
of policy decisions, the notion of the political business cycle, and the
Chicago-originated analysis that hinges on the distinction between the
short- and the long-run Phillips curve.(16)
7. Related Developments in the Mainstreams
In the interest of contrasting the mainstream views with those offered
here, the former were presented in their polar forms. Apart from matters
of style and attention to the real-cash-balance effect, Patinkin's macroeconomics
is a specimen of Ricardian long-run analysis. The objective is to compare
the characteristics of successive states of equilibrium which are separated
by a period of time sufficiently long for the economy fully to adjust to
all parametric changes. Changes in the relative prices and quantities of
different kinds of capital goods or other productive factors during the
equilibrating process are never brought into view.(17)
At the other end of the
spectrum is the extreme Keynesian view. With no effective intertemporal
link (money is a broken joint), the analysis focuses exclusively on the
short run. The long run, in this view, is nothing more than an unending
sequence of short runs each with its own equilibrium (or disequilibrium)
solution. Long-run truths, such as those implied by the quantity theory,
do no "fall out of" Keynesian models but rather have to be "forced into"
them. Analyses based on these models are wholly inadequate for showing
how the market adjusts over time to parametric or policy changes.
Clearly, the frontiers of
macroeconomics lie somewhere between the two extreme views. Somewhere between
the short run and the long run is the relevant run, the run in which all
the macromaladies manifest themselves, and hence the run in which these
phenomena must be analyzed. Modern attempts to get at the relevant run,
that is, to take both short-run and long-run considerations into account,
differ in terms of which of the two polar positions is adopted as the starting
point and what particular device is introduced to allow some movement toward
the other pole. While any number of individual contributions illustrating
this general approach could be cited, it will be convenient to focus attention
on two articles, one by David Laidler (1975), the other by Paul Davidson
(1980). These particular articles deserve to be singled out in part because
each of the two authors is clearly identifies with one of the mainstream
views, and in part because both of the articles explicitly recognize the
centrality of time and money in macroeconomic analysis. This facilitates
a comparison between the mainstream approaches and the Austrian approach
as outlined above.
Quoting selectively from
the Laidler article can establish that Laidler correctly perceives the
fundamental importance of time and money. One time: "Once they are committed
to a certain course of behavior, economic agents may not instantaneously
and costlessly change that commitment; thus the passage of time and its
irreversibility are matters of paramount importance in understanding economic
activity" (1975, p.5). On money: "there is no unique market for money,
and its 'price' emerges as a result of economic agents each setting the
price of a particular good he is supplying in terms of money" (1975, p.7).
But Laidler is working within the quantity-theory tradition—a tradition
that adopts as its starting point (and sometimes its ending point) the
assumption that enough time is allowed to elapse so that the unique
effects of money are fully dissipated. Some analytical device is
needed that will transform his long-run analytical framework into a framework
that can deal with the interplay between time and money. He needs to shorten
the long run, to loosen the tight joint of money. The device Laidler employs
is the one whose development is associated with the same tradition—the
market for information. By taking into account the simple fact that information
about the uncertain future is not costlessly available, Laidler is able
to deal with the phenomena that characterize the relevant run. The time
dimension, in effect, is captured, at least in part, by the market for
information. The interaction between this market for information and the
market for money constitutes what Laidler refers to as "the new microeconomics."
And he clearly recognizes the payoff of this approach. "It is the peculiar
contribution of the new microeconomics to macroeconomics that it explains
the time path of prices and their potential incompatibility with full employment
as a result of rational behavior in the face of imperfect and costly information
that is inherent in a market economy" (1975, p. 74).
In the above capsulization
of the approach that Laidler outlines, the market for information is somewhat
contentiously referred to as a "device." This characterization is intended
to suggest that the "new microeconomics" does not deal with the relevant
run in the most fundamental or direct way. The actual "market for information"—even
when conceived broadly to include education, consulting services, advertising,
and all printed matter—consists of a circumscribed set of activities. Though
important, the analysis of this market (or these markets) belongs to the
realm of the "old microeconomics." In order to transform the notion of
the "market for information" into a macroeconomic concept the term has
to be taken in a metaphorical sense. In any transaction involving any good
the buyer is also "buying information" about the price at which the seller
is actually willing to sell, and "selling information" about the price
he is actually willing to pay.(18) Transactions
involving particular goods may imply the "buying" and "selling" of other
kinds of information as well, For instance, in buying a tiller the buyer
"sells" information about the future demand for reapers.
Identifying the metaphoric
character of Laidler's "market for information" facilitates a comparison
between this particular approach and the one adopted by the Austrian school.
It suggests that the Austrian approach is the more fundamental and direct.
Markets that actually exist are markets for goods and services. Money is
taken into account by recognizing that each of the goods and services is
exchanged for money. The two approaches are equivalent in this respect.
Time is taken into account in the Austrian tradition by recognizing the
intertemporal relationship among the different goods and services. This
approach requires a theory of capital and an understanding of the economy's
structure of production. It is true that the passage of time implies the
existence of uncertainty which gives rise to a "market for information,"
but it does not follow that incorporating the market for information into
macroeconomics takes full account of the time dimension. The fundamental
intertemporal relationship between tillers and reapers, for instance, is
not captured by this approach. Uncertainty is a weak proxy for time. The
"market for information" is best viewed as a device for venturing into
the relevant run without having to grapple with capital theory and hence
with the more fundamental intertemporal relationships among the various
objects of exchange.
Paul Davidson's article
is, in an important sense, the Keynesian counterpart to Laidler's. In a
section titled "The importance of money" (1980, p. 164), Davidson discusses
indirect exchange in the context of the passage of time. He is clearly
attempting to get at the macroeconomics of the relevant run. The subject
matter is the same as in the Laidler article. But Davidson is working in
the tradition of the other mainstream. Where Laidler needed to loosen a
tight monetary joint, Davidson needs to create a joint where none existed;
where Laider needed to shorten the long run, Davidson needs to lengthen
the short run. The device that Davidson employs is the money-wage contract
(1980, pp. 164-167). It is primarily this particular intertemporal exchange
that keeps the passage of time from being nothing more than a sequence
of unrelated short runs. In Davidson's own words: "In a decentralized market
economy ... moving irresistibly through historical time into the uncertain
future, forward contracting for production inputs is essential to efficient
production planning. And the most ubiquitous forward contract of all in
such an economy, so long as slavery and peonage are illegal, is the money-wage
contract" (1980, pp. 165f). Where Laidler attempted to capture the time
dimension in the market for information, Davidson attempts to capture it
in the forward market for labor.
The term "device" is as
appropriate in describing Davidson's formulation as it was in describing
Laidler's. Although labor markets span the entire economy, the forward
dealing in these markets is only one of many ways that intertemporal exchange
takes place. Contrary to Davidson's suggestion, there is no reason that
this particular type of intertemporal transaction should be singled out
for special treatment. Goods and services in general are related to one
another over time. The general theory of the nature of these intertemporal
relationships and of how these relationships may be affected by parametric
or policy changes is what constitutes capital theory. But capital theory
is precisely what is lacking in both mainstreams. The "money-wage contract"
is best viewed as Davidson's device for venturing into the relevant run
(venturing in to meet Laidler, who has ventured in from the other direction)
without having to deal in any general way with the basic issues of capital
8. Summary and Conclusion
To recognize time and money as the universals of macroeconomic theorizing
is to define the domain of macroeconomics as the interaction of the "market
for time" and the "market for money." This conception of macroeconomics,
which has merit in its own right, allows for a fruitful comparison of mainstream
views. It points to the indirectness with which the mainstream theories
deal with the time element. The practice of using weak surrogates for the
time dimension, such as the market for information or the forward market
for labor, causes the more fundamental intertemporal relationships, as
spelled out in Austrian capital theory, to be overlooked.
The inadequacies of the
two mainstreams are identified in a way that suggests the appropriate remedy.
Since the Keynesian revolution the development of macroeconomics (by both
Keynesians and Monetarists) has proceeded in the absence of any coherent
theory of capital. The present paper suggests that the reincorporation
of capital theory into macroeconomics would pave the way toward a more
fundamental treatment of the time element and a reconciliation of the two
Bellante, D. "A Subjectivist Essay on Modern Labor Economics."
and Decision Economics. 4 (December 1983): 234-243.
Birch, D. E., A. A. Rabin, and L. B. Yeager. "Inflation,
Output, and Employment: Some Clarifications." Economic Inquiry 20
(April 1982): 209-221.
Böhm-Bawerk, E. Capital and Interest. 3 vols.
South Holland, IL: Libertarian Press, 1959.
Clower, R. W. "A Reconsideration of the Microfoundations
of Monetary Theory." Western Economic Journal 6 (December 1967):
Davidson, P. "Post Keynesian Economics." Public Interest
(Special Issue, 1980): 151-173.
Garrison, R. W. "Austrian Economics as the Middle Ground:
Comment on Loasby." In Method, Process, and Austrian Economics: Essays
in Honor of Ludwig von Mises. I. M. Kirzner, ed. Lexington, MA: Lexington
Books, 1982, 131-38.
________. "Austrian Macroeconomics: A Diagrammatical Exposition."
In New Directions in Austrian Economics. L. M. Spadaro, ed. Kansas
City: Sheed, Andrews, and McMeel, 1978, 167-204.
Hahn, F. "General Equilibrium Theory," Public Interest
(Special Issue, 1980): 123-138.
Hayek, F. A. Monetary Theory and the Trade Cycle.
New York: Augustus M. Kelley, 1975.
________. Prices and Production. 2nd
ed. New York: Augustus M. Kelley, 1967.
________. The Pure Theory of Capital. Chicago:
University of Chicago Press, 1941.
________. "The Use of Knowledge in Society." American
Economic Review 35 (September 1945): 519-530.
Hutt, W. H. The Keynesian Episode. Indianapolis:
Liberty Press, 1979.
Jevons, W. S. The Theory of Political Economy.
Middlesex: Penguin Books, 1970.
Keynes, J. M. The General Theory of Employment, Interest,
and Money. New York: Harcourt, Brace, and World, 1964.
Laidler, D. E. W. "Information, Money and the Macroeconomics
of Inflation." In his Essays on Money and Inflation. Chicago: University
of Chicago Press, 1975.
Leijonhufvud, A. On Keynesian Economics and the Economics
of Keynes. New York" Oxford University Press, 1968.
________. "The Varieties of Price Theory" What Microfoundations
for Macro Theory?" UCLA Discussion Paper, No. 44, 1974.
Lewin, P. "Perspectives on the Cost of Inflation." Southern
Economic Journal 48 (January 1982): 627-641.
Lutz, F. A. "On Neutral Money." In Roads to Freedom:
Essays in Honor of Friedrich A. von Hayek. E. Streissler, G. Haberler,
F. A. Lutz, and F. Machlup, eds. London: Routledge and Kegan Paul, 1969.
Menger, C. Principles of Economics. New York: Free
Market Press, 1950.
Mises, L. Human Action: A Treatise on Economics.
3rd rev. ed. Chicago: Henry Regnery, 1966.
________. The Theory of Money and Credit. New Haven:
Yale University Press, 1953.
O'Driscoll, G. P., Jr. "Rational Expectations, Politics,
and Stagflation," In Time, Uncertainty, and Disequilibrium. M. J.Rizzo,
ed. Lexington, MA: Lexington Books, 1979.
________. And M. J. Rizzo with R. W. Garrison. The
Economics of Time and Ignorance. Oxford: Basis Blackwell, 1985.
Patinkin, D. Money, Interest, and Prices. 2nd
ed. New York: Harper and Row, 1965.
Schumpeter, J. A. History of Economic Analysis.
New York: Oxford University Press, 1954.
Wicksell, K. Interest and Prices. London: Macmillan,
Yeager, L. B. "Essential Properties of the Medium of Exchange."
21 (January/March 1968): 45-68.
1. See Hayek (1967), Garrison (1978),
and O'Driscoll and Rizzo (1985),
2. Major contributions to this literature
include Clower (1987) and Leijonhufvud (1974). For recent Austrian-oriented
contributions, see O'Driscoll (1979) and Lewin (1982).
3. See, for instance, Böhm-Bawerk
(1959, vol. 2, pp. 259-289) and Mises (1966, pp. 99-104, 479-537, and passim).
4. Efforts to reintroduce the time
dimension in some artificial way-such as by defining the different goods
of a general-equilibrium model partly in terms of the time they are available
for consumption-have served to obscure rather than resolve the difficulties
associated with the time element. For a candid recognition of this and
other limitations of general equilibrium theory, see Hahn (1980).
5. This imagery, of course, is from
6. For early attention of this aspect
of a monetary economy, see Mises (1953). More recently, this aspect has
received due attention from Yeager (1968) and Birch, Rabin, and Yeager
7. In laying the "foundations of monetary
theory," Clower (1967, pp. 207f) offers the idea in the form of an aphorism:
"Money buys goods and goods buy money, but goods do not buy goods.
This restriction is-or ought to be-the central theme of the theory of a
money economy" (emphasis in the original). To recognize the validity and
importance of Clower's aphorism is to endorse the assessment that Whilhelm
Roscher, founder of the early historical school, made over a century ago.
All false theories of money fall into one of two categories: those that
take money to be something more than the most saleable of all commodities,
and those that take it to be something less. See Schumpeter (1954, p. 699).
8. Keynes's "Sundry Observations of
the Nature of Capital" (1964, pp. 210-221) do not add up to a coherent
theory of capital.
9. It might be noted that the assumption
of tight-jointed money is not to be condemned in all contexts. This assumption
gives meaning to the notion that "money is a veil." It allows us to identify
the underlying general-equilibrium relationships with which any theory,
macroeconomic or otherwise, must ultimately be reconciled. The assumption
of tight-jointed money also allows us to defend the kernel of truth in
the quantity theory of money. At the same time the need to make this assumption
warns us of the limited applicability of the simple quantity theory. But
all the interesting macroeconomic phenomena, which manifest themselves
as economywide coordination failures, depend critically on the fact that
real-world money is not of the tight-jointed variety.
10. For a corroboration assessment
of the "post-Wicksellians," see Hutt (1979, p. 117).
11. Hayek (1975, pp. 109-116) was
critical of Wicksell for his undue attention to the general price level.
12. See, for instance, the criticisms
of Lutz (1969, pp. 115-16).
13. For a general view of Austrian
economics as a middle-ground position, see Garrison (1982, pp. 131-38).
14. See Hayek (1967, pp. 54-60).
15. For development of this contrast
between the mainstream and Austrian views, see Bellante (1983).
16. Although Milton Friedman made
the short-run/long-run distinction in terms of the Phillips curve in his
1967 AEA presidential address, the distinction itself and its relevance
to monetary policy are prominent in the early works of Mises (1953) and
Hayek (1967, 1975). I am indebted to an anonymous referee for making this
17. In its polar form, Patinkin-type
macroeconomics comes complete with a modern analog of the Ricardian vice:
In effect, the analysis that is only applied after the dust has settled
is used to suggest that there is no problem with dust.
18. This is the sense in which prices
are "signals" and the market is a "communications network." See Hayek (1945).