By Robert Mulligan

Roger W. Garrison of Auburn presents the Austrian theory of the business cycle in a lucid and thorough new book that also compares and contrasts alternative Keynesian and monetarist theories within a common theoretical framework.
          In Time and Money: the Macroeconomics of Capital Structure, he makes extensive use of the Hayekian triangle introduced by Nobel laureate Friedrich A. Hayek in his Prices and Production in 1931.
          Production takes time, and Hayek illustrated the production process as a right triangle with the base as production time, the height as the output delivered to consumers, and the slope of the hypotenuse proportional to the interest rate.
          For illustrative purposes, Garrison divides the base of the triangle into five hypothetical stages of production: mining, refining, manufacturing, wholesale and retail.
          Mining is at the point of the triangle, most remote from the final consumer, who buys the final consumption goods from a retailer. Value is added at each stage of production, adding to the value of final output delivered to the consumer through retail.
          The main problem (Memo to Alan Greenspan!) comes when the government or the Federal Reserve artificially lower the interest rate below the sustainable natural rate. The money supply is increased without raising consumer desire to save or lowering their desire to consume.
          Saving and consumption stay the same, but investment increases by the increase in the money supply. Because the interest rate goes down, new investment is concentrated in earlier stages of production, but consumers continue to buy the same amount as before, so the height of the triangle remains unchanged.
          Something has to give, and the triangle becomes pinched in the middle, and eventually the economy has so many resources allocated to earlier stages of production it can no longer supply the same high output desired by consumers, resulting in recession and unemployment.
          Firms lay off workers because the equipment they were hired to operate yields too low a return. The low yield was fine at the artificially low interest rate, but once the injection of new money ends, the interest rate returns to its sustainable market level, and production has to yield a better return to stay competitive.
           One cause of the persistence of recessions, six months to two years, is the fact that installed capital cannot be reallocated very quickly.
          The greatest virtue of this book is its clear explanation of the business cycle, something that should appeal to all interested readers.
          In addition, Garrison also presents alternative Keynesian, monetarist, and new classical theories of the business cycle in the same framework.
          This allows the reader to understand how the different schools of economic thought relate to each other, and compare their theories of the business cycle. It also ensures the book a wide academic audience outside the Austrian school.
          Its first printing has already sold out, something very unusual for an academic book, and hopefully a less pricey paperback edition will be available soon. 

Robert F. Mulligan is assistant professor of economics in the business computer information systems and economics department in the College of Business at Western Carolina University. For previously reviewed books, visit Web site at