TIME AND MONEY
My venture into macroeconomics
has not been a conventional one. In the mid sixties, I took a one-semester
course in microeconomic and macroeconomic principles in partial fulfillment
of the social-studies requirement in an engineering curriculum. The text
was the sixth edition (1964) of Samuelson's
Economics. It was several
years later that I returned on my own to reconsider the principles that
govern the macroeconomy, having stumbled upon Henry Hazlitt's
of the "New Economics" (1959). The first few chapters of this critique
of Keynes's General Theory of Employment Interest and Money (1936)
were enough to persuade me that I could not read Hazlitt's book with profit
unless I first read Keynes's. I had no idea at the time what actually lay
in store for me.
In his own preface, Keynes does warn the reader that his arguments are
aimed at his fellow economists, but he invites interested others to eavesdrop.
As it turned out, even the most careful reading of the General Theory's
384 pages and the most intense pondering of its one solitary diagram were
not enough to elevate me much beyond the status of eavesdropper. But Keynes
made me feel that I was listening in on something important and mysterious.
The ideas that investment is governed by "animal spirits" and that the
use of savings is constricted by the "fetish of liquidity" do not integrate
well with more conventional views of the free-enterprise system. Keynes's
notion that the rate of interest could and should be driven to zero seemed
puzzling, and his call for a "comprehensive socialization of investment"
was cause for concern.
With Keynes's mode of argument--though not the full logic of his system--fresh
in my mind, Hazlitt's book was intelligible, but his virtual page-by-page
critique came across as the work of an unreceptive and hostile eavesdropper.
Keynes's vision of the macroeconomy--in which the market tends toward depression
and instability and in which the government assumes the role of stimulating
and stabilizing it until social reform can replace it with something better--was
never effectively countered. Hazlitt did point to the Austrian economists
as the ones offering the most worthy alternative vision. There were a double
handful of references to Friedrich A. Hayek's writings and twice that many
to Ludwig von Mises'. My self-directed study expanded to include Mises'
of Money and Credit ( 1953), Hayek's Prices and Production
1967), and, soon enough, Murray Rothbard's America's Great Depression
After a diet of Keynes, contra-Keynes, and then Austrian economics, I returned
to my old principles text to see how I had failed to come to any understanding
at all during my undergraduate experience with macroeconomics. In Samuelson's
chapters on the macroeconomy, I found a total gloss of the issues. The
fundamental questions of whether, how, and in what institutional settings
a market economy can be self-regulating were eclipsed by a strong presumption
that self regulation is not possible and by simplistic exercises showing
how in a failure-prone macroeconomy the extent of labor and resource idleness
is related to the leakages from--and injections into--the economy's streams
In the early 1970s I entered the graduate program at the University of
Missouri, Kansas City, where I learned the intermediate and (at the time)
advanced versions of Keynesianism. Having read and by then reread the General
Theory, the ISLM framework struck me as a clever pedagogical tool but
one that, like Samuelson's gloss, left the heart and soul out of Keynes's
vision of the macroeconomy. It was at that time that I first conceived
of an Austrian counterpart to ISLM--with a treatment of the fundamental
issues of the economy's self-regulating capabilities emerging from a comparison
of the two contrasting graphical frameworks.
Initially drafted as a term paper, my "Austrian Macroeconomics: A Diagrammatical
Exposition," was presented at a professional meeting in Chicago in 1973.
In 1976 I rewrote it for a conference on Austrian Economics sponsored by
the Institute for Humane Studies and held at Windsor Castle, after which
it appeared in the conference volume titled New Directions in Austrian
Economics (Spadaro, 1978). This early graphical exposition had a certain
limited but enduring success. It was published separately as a monograph
by the Institute for Humane Studies and was excerpted extensively in Duncan
Reekie's Markets, Entrepreneurs and Liberty: An Austrian View of Capitalism
(1984: 75-83). It continues to appear on Austrian economics reading lists,
was the basis for some discussion in an interview
published in Snowden et al. (1994), and tends to get mentioned in histories
of the Austrian school, such as in Vaughn (1994), and in survey articles,
such as in Kirzner (1997).
Though largely compatible with the graphical exposition offered in the
present volume, this earlier effort was inspired by Mises's original account
of boom and bust--an account that was anchored in classical modes of thought:
"The period of production ... must be of such a length that exactly the
whole available subsistence fund is necessary on the one hand and sufficient
on the other for paying the wages of the labourers throughout the duration
of the productive process" (Mises,  1953: 360). This classical language
got translated into graphical expression as the supply and demand for dated
labor--with the production period being represented by the time elapsing
between the employment of labor and the emergence of consumable output.
While this construction served its purpose, it placed undue emphasis on
the notion of a period of production and put an undue burden on the reader
of interpreting the graphics in the light of the more modern language of
Resuming my graduate studies--at the University of Virginia--I dropped
the graphical framework but continued to deal with the conflict of visions
that separated the Keynesian and Austrian schools. From my dissertation
came two relevant articles, "Intertemporal Coordination and the Invisible
Hand: An Austrian Perspective on the Keynesian Vision" (1985a) and "Austrian
Capital Theory: The Early Controversies" (1990). Bellante
and Garrison (1988), together with the two dozen or so of my singly
authored articles that appear in the bibliography, undergird or anticipate
to one extent or another the theme of the present volume.
Since 1978, when I joined the faculty at Auburn University, I have taught
courses in macroeconomics at the introductory, intermediate, and graduate
levels. During the summers I have lectured on business cycle theory and
on related issues in teaching seminars sponsored by such organizations
as the Institute for Humane Studies, the Ludwig von Mises Institute, and
the Foundation for Economic Education. I hit upon the interlocking graphical
framework presented in Chapter 3 while teaching intermediate macroeconomics
in 1995. Since that time I have used this framework in other courses and
have presented it at conferences and teaching seminars with some success.
At the very least, it helps in explaining just what the Austrian theory
is. But because the interlocking graphics impose a certain discipline on
the theorizing, they help in demonstrating the coherence of the Austrian
vision. For many students, then, the framework goes beyond exposition to
My final understanding of Keynesianism comes substantially from my own
reading of Keynes's General Theory together with his earlier writings,
but it owes much to two of Keynes's interpreters--Allan Meltzer and Axel
Leijonhufvud. In 1986 I had the privilege of participating in a Liberty
Fund Conference devoted to discussing Allan Meltzer's then-forthcoming
book, Keynes's Monetary Theory: A Different Interpretation (1988).
Though called a "different interpretation," Meltzer had simply taken Keynes
at his word where other interpreters had been dismissive of his excesses.
The notions of socializing investment to avoid the risks unique to decentralized
decision-making and driving the interest rate to zero in order that capital
be increased until it ceases to be scarce were given their due. Meltzer
had put the heart and soul back into Keynesianism. My subsequent review
article (1993a) substantially anticipates the treatment of these essential
aspects of Keynes's vision in Chapter 9.
Leijonhufvud, who was also a participant at the conference on Meltzer's
book, has influenced my own thinking in more subtle--though no less substantial-ways.
Leijonhufvud (1968) is a treasure-trove of Keynes-inspired insights into
the workings of the macroeconomy, and Leijonhufvud (1981) links many of
those insights to the writings of Knut Wicksell in a way that the Austrian
economists, who themselves owe so much to Wicksell, cannot help but appreciate.
Though Leijonhufvud has often been critical of Austrian theory, he has
always seen merit in emphasizing the heterogeneity of capital goods and
the subjectivity of entrepreneurial expectations (1981b: 197) and has recently
called for renewed attention to the problems of intertemporal coordination
(1998: 197-202). I have dealt only tangentially with Leijonhufvud's views
of Keynes and the Austrians (Garrison, 1992a:
144-45), including, though, a mild chiding for his reluctance to integrate
Austrian capital theory into his own macroeconomics (1992a: 146-47, n10).
A late rereading of Leijonhufvud (1981) and the recent appearance of Leijonhufvud
(1999), however, revealed that my treatment in Chapter 8 of Keynes's views
on macroeconomic stimulation and stabilization is consistent in most all
important respects to Leijonhufvud's reconstruction of Keynesian theory.
My understanding of Monetarism reflects the influence of Leland Yeager,
though in ways he may not appreciate. In fact, had I taken his blunt and
frequent condemnations of Austrian business cycle theory to heart, I would
never have conceived of writing this book. But as professor and dissertation
director at the University of Virginia and as colleague and friend at Auburn
University, he has influenced me in many positive ways. For one, Yeager's
graduate course in macroeconomics focused intensely on Don Patinkin's Money,
Interest, and Prices (1965). Having profited greatly from that course,
I show, in Chapter 10, that Patinkin's account of interest-rate dynamics
complements the more conventional Monetarist theory in a way that moves
Monetarism in the direction of Austrianism. For another, his exposition
and development of Monetary Disequilibrium Theory has persuaded me, as
I explain in chapter 11, that pre-Friedman Monetarism is an essential complement
to the Austrian theory--though Yeager himself sees the Austrian theory
as an embarrassingly poor substitute for Monetary Disequilibrium Theory.
I had occasion to learn from and interact with Ludwig Lachmann in the early
1980s when he was a visiting professor at New York University and I was
a postdoctoral fellow there. As recounted in Chapter 2, Lachmann's ideas
about expectations and the market process served as an inspiration for
many of my own arguments.
Though I met and talked with Friedrich Hayek
on several occasions, I can hardly claim to have known him. However, the
reader will not fail to notice his influence in virtually every chapter--and
in virtually every graph--of this book. His writings fueled my interest
in the early years and in later years provided the strongest support for
my own rendition of Austrian macroeconomics. It is to Hayek, then, that
I owe my greatest intellectual debt.