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?" [1990] 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 schilling.
        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 fruitful.
        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 topic.
        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 structure.
        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 compartmentalized topic.
        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 goods.
        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 Revolution.

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 manipulation.
        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 full employment.

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 performance.

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 policy.⁽⁸⁾
        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 microeconomics.
        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 discoordination. 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.

References

Bellante, Don and Roger W. Garrison. "Phillips Curves and Hayekian Triangles: Two Perspectives on Monetary Dynamics," History of Political Economy, vol. 20, no. 2 (Summer), 1988, pp. 207-34.

Böhm-Bawerk, Eugen. Capital and Interest, 3 vols. [originally published in German in 1884, 1889, and 1909], South Holland, IL: Libertarian Press, 1959.

Garrison Roger W. "West's "Cantillon and Adam Smith": A Comment," Journal of Libertarian Studies, vol. 7, no. 2 (Summer), 1985, pp. 287-94.

________. "Full Employment and Intertemporal Coordination: a Rejoinder," History of Political Economy, vol. 19, no. 2 (Summer), 1987, pp. 335-41.

________. "The Austrian Theory of the Business Cycle in the Light of Modern Macroeconomics," Review of Austrian Economics, vol. 3, 1989, pp. 3-29.

________. "Is Milton Friedman a Keynesian?" in Mark Skousen, ed., Dissent on Keynes, New York: Praeger Publishers, 1990 (forthcoming).

Hayek, Friedrich A. "`Demand for Commodities is not Demand for Labor' versus the Doctrine of `Derived Demand,'" included as Appendix III in Hayek, The Pure Theory of Capital, Chicago: Universtiy of Chicago Press, 1941, pp. 433-39.

________. Prices and Production, 2nd ed., New York: Augustus M. Kelley, Publishers, 1967 [1935].

________. Profits, Interest and Investment, Clifton, NJ: Augustus M. Kelley, Publishers, 1975 [1939].

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Keynes, John M. The General Theory of Employment, Interest, and Money, New York: Harcourt, Brace and World, Inc., 1964 [1936].

Lachmann, Ludwig M. Capital and Its Structure, Kansas City: Sheed, Andrews and McMeel, Inc., 1978 [1956].

Mill, John S. Principles of Political Economy, London: George Routledge and Sons, Ltd., 1895 [1848].

________. "On the Words Productive and Unproductive," in J. S. Mill, Essays on Some Unsettled Questions of Political Economy, 2nd ed., 1974 [1874], pp. 75-89.

Mises, Ludwig von. Human Action: A Treatise on Economics, 3rd rev. ed., Chicago: Henry Regnery and Co., 1966.

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Smith, Adam. An Inquiry into the Nature and Causes of The Wealth of Nations, New York: Modern Library, 1937 [1776].

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Notes

1. It is argued by Garrison [1989, p. 16] that John Hicks [1967] 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 [1985].

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 [1975] 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 [1966] and Hayek [1967]. See Garrison [1985] 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 textbooks.

8. In Part II of his title essay, "Profits, Interest and Investment," Hayek [1975] 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 [1987].

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 [1967]. Bellante and Garrison [1988] compare Hayekian triangles and Phillips Curves as alternative approaches to dealing with monetary dynamics. Skousen [1990] 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.