ROUTLEDGE 2001


     


    Time and Money

    The Macroeconomics of Capital Structure
    Roger W. Garrison



    A Synopsis

    Time and Money presents a new macroeconomic framework for dealing with the perennial issues of economic growth and business cycles. With attention to the time element in the economy's production process, the logic and the graphics of capital-based macroeconomics highlight the contrast between genuine growth and unsustainable expansions. Constructed to capture the insights of the Austrian economists Ludwig von Mises and Friedrich A. Hayek, this same interlocking graphical framework demonstrates the coherence of Austrian macroeconomics and facilitates the analysis of deficit spending, credit controls, tax reform, and more.
           An alternative, labor-based framework is presented to depict the failure-prone macroeconomy of John Maynard Keynes's General Theory. With key relationships common to both frameworks, the playoff between them allows Keynes and Hayek to go head-to-head. This exercise in comparative theories holds promise for a final resolution of the critical Keynes-Hayek debate of the 1930s: Does a market economy have self-regulating tendencies? Keynes said no; Hayek said yes. The Keynesian labor-based framework, demonstrably truer to Keynes than the more conventional ISLM and Aggregate-Supply/Aggregate-Demand frameworks, also allows for a unified treatment of Keynes's policy recommendations for stabilising the macroeconomy and his more lofty proposals for fundamental social reform.
           After suggesting that the Keynes-Hayek debate can be resolved in favor of Hayek, both frameworks are used to trace and evaluate the developments of modern macroeconomics, including two different strands of monetarism and some essential aspects of new classicism and new Keynesianism. The increasing sterility and irrelevance of modern macroeconomic theorizing is ultimately attributed to the inadequate treatment of the time element in macroeconomic relationships or, more pointedly, to the neglect of the issue of capital structure and intertemporal coordination. The suggested remedy entails reintroducing the time element in the form of a thoroughgoing capital-based macroeconomics.


     Preface


    PART I: FRAMEWORKS

    1. The Macroeconomics of Capital Structure
          The Long and the Short of It
          What's in a Name?
                Labor-Based Macroeconomics
                Money-Based Macroeconomics
                Capital-Based Macroeconomics
          An Exercise in Comparative Frameworks
          Point of Departure and Style of Argument
          A Readers' Guide

    2. An Agenda for Macroeconomics
          What About Expectations?
          The Keynesian Spur
          Meeting the Challenge to Austrian Theory
          What About Capital?


    PART II: CAPITAL AND TIME

    3. Capital-Based Macroeconomics
          The Elements of Capital-Based Macroeconomics
                The Market for Loanable Funds
                The Production Possibilities Frontier
                The Intertemporal Structure of Production
          The Macroeconomics of Capital Structure
          The Macroeconomics of Secular Growth

    4. Sustainable and Unsustainable Growth
          Changes in Technology and Resource Availabilities
          Changes in Intertemporal Preferences
          The Macroeconomics of Boom and Bust
          The Elasticity of Expectations and the Lag Structure

    5. Fiscal and Regulatory Issues
          Deficit Finance
          Deficit Spending
                Inert Government Projects
                Nationalized Industries
                Infrastructure
          Credit Control
                Smith's Usury Laws
                Broad-Based Usury Laws
          Tax Reform

    6. Risk, Debt and Bubbles: Variation on a Theme
          Three Components of the Interest Rate
          Risk Control and Risk Externalization
          Fiscal Excesses in Perspective
                Domestic Savers
                The Federal Reserve
                Foreign Savers
          The Dynamics of Deficit Accommodation
          Coping Without a Crystal Ball
          Booms and Busts in the "Emerging Nations"


    PART III: KEYNES AND CAPITALISM

    7. Labor-Based Macroeconomics
          The Elements of Keynesian Economics
                The Labor Market
                The Wage Rate
                The Structure of Industry
                Income and Expenditures
                The Production Possibilities Frontier
                The Market for Loanable Funds
          Contrasting Visions

    8. Cyclical Unemployment and Policy Prescription
          From Accident to Design
          Prospects for a Spontaneous Order
          The Paradox of Thrift
          Keynes and Hayek: Head to Head

    9. Secular Unemployment and Social Reform
          The Fetish of Liquidity and Secular Unemployment
          The Distribution of Income and Secular Unemployment
          Lenders' Risk and Decentralized Decision-making
          Full Employment through Centralization


    PART IV: MONEY AND PRICES 

    10. Boom and Bust in the Monetarist Vision
          Monetarist Frameworks
                Patinkin's Model
                Short-Run/Long-Run Phillips Curve Analysis
                Resolving a Seeming Contradiction
          Boom and Bust in the Labor-Based Framework
          Boom and Bust in the Capital-Based Framework
          Monetarist and Austrian Visions: A Reconciliation
          Morphing from Friedman to Hayek

    11. Monetary Disequilibrium Theory
          Friedman's Plucking Model
          Levels of Aggregation
          Macroeconomic Data and Microeconomic Doubts
          Ceilings and Asymmetries
          Depressions as Monetary Disequilibrium
          Plucking in the Keynesian and Austrian Frameworks
          Rival Theories?
          Interlocking Pieces in Macroeconomic Puzzle


    PART V: PERSPECTIVE

    12. Macroeconomics: Taxonomy and Perspective
          Capital-Based Macroeconomics in Perspective
          Visions, Frameworks, and Judgments


    BIBLIOGRAPHY



     
    List of Figures

    Fig. 3.1 The Market for Loanable Funds (or for Investable Resources)
    Fig. 3.2 The Production Possibilities Frontier (Guns and Butter)
    Fig. 3.3 Capital and Growth (Post-War Japan and the United States)
    Fig. 3.4 Gross Investment and Growth (Contraction, No Growth, and Expansion)
    Fig. 3.5 The Structure of Production (Continuous-Input/Point-Output)
    Fig. 3.6 The Structure of Production (Continuous-Input/Continuous-Output)
    Fig. 3.7 The Macroeconomics of Capital Structure
    Fig. 3.8 Secular Growth (with an Assumed Interest-Rate Neutrality)

    Fig. 4.1 Technology-Induced Growth
    Fig. 4.2 Saving-Induced Capital Restructuring
    Fig. 4.3 Capital Restructuring (with Auxiliary Labor-Market Adjustments)
    Fig. 4.4 Boom and Bust (Policy-Induced Intertemporal Disequilibrium)
    Fig. 4.5 A Generalization of the Austrian Theory

    Fig. 5.1 Deficit Finance (Shifting the Debt Burden Forward)
    Fig. 5.2 Deficit Finance (with Ricardian Equivalence)
    Fig. 5.3 Deficit Spending (Borrowing to Finance Inert Government Projects)
    Fig. 5.4 Deficit Spending (Borrowing to Finance Infrastructure)
    Fig. 5.5 Credit Control (Broad-Based Interest-Rate Ceiling)
    Fig. 5.6 Tax Reform (From an Income Tax to a Consumption Tax)

    Fig. 7.1 Labor-Based Macroeconomics (Full Employment by Accident)
    Fig. 7.2 Labor-Based Macroeconomics (with Keynesian Adjustment Potentials)
    Fig. 7.3 Labor-Based Macroeconomics (with Austrian Adjustment Potentials)

    Fig. 8.1 Market Malady (A Collapse in Investment Demand)
    Fig. 8.2 Locking in the Malady (with a Flexible Wage Rate)
    Fig. 8.3 Compounding the Market Malady (with a Scramble for Liquidity)
    Fig. 8.4 Full Employment by Design (through Monetary and Fiscal Policies)
    Fig. 8.5 The Keynesian Vision Plus Self-Correcting Tendencies
    Fig. 8.6 The Paradox of Thrift (Saving More Means Earning Less)
    Fig. 8.7 The Paradox of Thrift (Keynesian Vision in a Hayekian Framework)
    Fig. 8.8 Resolving the Paradox of Thrift (with Intertemporal Restructuring)
    Fig. 8.9 Keynes and Hayek (Head to Head)
    Fig. 8.10 A Contrast of Visions (Keynes and Hayek)

    Fig. 9.1 Fetish of Liquidity (with Assumed Structural Fixity)
    Fig. 9.2 Fetish of Liquidity (with the Implied Structural Adjustments)
    Fig. 9.3 Full Investment (with Zero Interest and No Scarcity Value of Capital)

    Fig. 10.1 Monetarist Framework (Wicksell-Patinkin)
    Fig. 10.2 Monetarist Framework (Friedman-Phelps)
    Fig. 10.3 Labor-Market Adjustments to an Increased Money Supply
    Fig. 10.4 Labor-Based Framework (with All Magnitudes in Real Terms)
    Fig. 10.5 Boom and Bust (A Labor-Based View of Phillips Curve Analysis)
    Fig. 10.6 Boom and Bust (A Labor-Based View of the Real-Cash-Balance Effect)
    Fig. 10.7 Capital-Based Framework (with All Magnitudes in Real Terms)
    Fig. 10.8 Boom and Bust (A Capital-based View of Phillips Curve Analysis)
    Fig.. 10.9 Boom and Bust (A Capital-based View of the Real-Cash-Balance Effect)

    Fig. 11.1 Collapse and Recovery (Friedman's Plucking Model)
    Fig. 11.2 Monetary Disequilibrium (in the Labor-Based Framework)
    Fig. 11.3 Monetary Disequilibrium (in the Capital-Based Framework)

    Fig. 12.1 Graphical Taxonomy of Visions
    Fig. 12.2 A Matrix of Frameworks and Judgments