Economic Affairs
Journal of the Institute for Economic Affairs
Volume 22, Number 2, June 2002
Time and Money: The Macroeconomics of Capital Structure
Roger W. Garrison
London: Routledge, 272 pp.
ISBN 0 415 07982 9 (hb), 2001

As this is being written in October 2001, major parts of the global economy are entering a recession the depth and duration of which remain a matter of speculation. In each country governments stand ready to administer their policy responses. The extent and timing of these monetary and fiscal stimuli are a matter for ad hoc judgment. Such judgments have been formed largely by a process of trial and error: the experience of more than half a century of government intervention since the idea that market economies could be relied upon to be entirely self-adjusting was abandoned in the 1930s. However, our intellectual understanding of the periodic fluctuations which characterise advanced market economies, the cycle of "boom and bust," has scarcely improved at all during this period. The postwar development of macroeconomic theory has proved to be a theoretical cul-de-sac.

     The last great theoretical debate on the business cycle began in 1930 with F. A. Hayek's review of John Maynard Keynes's Treatise on Money. Hayek criticised the Treatise for its lack of a coherent theory of capital, without which, he argued, it is impossible to analyse satisfactorily the effects of monetary and real disturbances on output. The debate ended in 1941 with the publication of Hayek's Pure Theory of Capital. (A planned second volume on capital and money was never written.) By that time, despite the flaws in the General Theory, Keynes had won the policy argument, and Hayek did not return to the attack. The valuable postwar contributions of Ludwig Lachmann and Israel Kirzner have been largely ignored. Students of political history may be interested to know that among the contributors to this scholarly debate was Hugh Gaitskell, who demonstrated in a 1938 article his familiarity with the voluminous German literature on the period of production.
     Hayek's analysis showed that, even if distortions introduced by monetary policies were set aside, there would remain potential problems in a market economy arising from the intertemporal allocation of resources. Adam Smith had identified the increasing specialisation of labour as a necessary condition for economic progress. Following Carl Menger, Hayek noted a complementary aspect of this process of increasing specialisation, namely the adoption of increasingly indirect and thus increasingly time-consuming methods of production, these methods being embodied in ever-more-specific types of capital. At any moment of time, the stock of capital is made up of an array of specific goods which differ in their maturity, and whose value depends on the value of the consumption goods to which they are (directly and indirectly) inputs. Thus changes in the demand for one consumption good relative to another bring about changes in the value of particular (non-mobile) capital goods. As entrepreneurs are obliged to revise their expectations of the values of these specific capital goods, the possibilities for maladjustment or breakdowns in co-ordination within a modern market economy are evidently quite large. It may be thought that what is remarkable about contemporary advanced market economies with their extraordinarily complex capital structures is not that the cumulative effects of such maladjustments should be so extensive, but that they appear to be relatively limited.
     Roger Garrison has spent the last 25 years of his academic career studying the contrasting visions of the Keynesian, Monetarist and Austrian schools of thought. This book contains the fruits of much of this work. Beginning with a critical history of the principle, he assembles a simple but straightforward graphical framework of analysis which allows him to conclude with an interesting taxonomy of macroeconomic theories. He does not insist on the Austrian version as being the only one worthy of serious consideration. he simply contends that the passage of time, and its embodiment in a heterogeneous capital stock, is a factor which, along with expectations and money, deserves a central place in any worthwhile explanation of the cyclical fluctuations which characterise the market economy. His style of writing is crisp and lucid, and his avoidance of all but the most essential jargon means that his book is accessible to the non-specialist. It can be highly recommended to anyone who is interested in the subject. 

David Simpson
David Hume Institute, Edinburgh. 


This review, first published in Economic Affairs, vol. 22, no. 2, p. 58, is made available here with the permission of IEA.