My favorite economist is surely Roger W. Garrison, author of “Austrian Macroeconomics: A Diagrammatical Exposition,” and more importantly, “Time and Money: The Macroeconomics of Capital Structure.” He has also, of course, written a myriad of articles, such as “AS/AD: A Sad Development in Macroeconomic Pedagogy.” Before reading this, one will need to at least understand Garrison’s framework of macro based upon the capital theory propounded by the Austrian school. The quickest and easiest route to this is by watching perhaps the most important YouTube video you will ever see: The Austrian Theory of the Business Cycle. There are several recordings of this lecture, but be assured that the one I link to is the most in-depth and comprehensive recording available. Also keep in mind that the title of this video is a misnomer, as the majority of it is actually an explanation of Garrison’s macro framework that squares perfectly with the vast majority of Austrian theorists, despite the (slowly sublimating) opposition of many Austrians to graphical representation and the idea of a “macro-” economics as a whole.
I lied earlier; I offer my apologies. In order to pick up on what I am talking about in this article, the reader will also need to have at least a solid, if not deep and detailed understanding of Milton Friedman’s brand of monetarism, while also maintaining at least a cursory understanding of Ludwig Lachmann’s own tangential brand of Austrianism. One might describe Lachmann’s general attitude towards intertemporal coordination in regards to underlying monetary forces as “equilibrium never,” as Garrison aptly simplifies it, a position that stands in direct contrast to Robert Lucas’s “equilibrium always” (of which knowledge will here be helpful but not as strictly necessary).
Garrison’s central point is that, given a money supply dominated by market forces and thus forced to follow the same rules that govern the creation of cars and pachinko machines, and assuming away the detriments of a government that sucks money out of its own economy through any deficit finance (page fifty), it can safely be assumed that an economy will tend towards a sustainable combination of consumption and investment/savings; any of a set of points on the production-possibilities frontier of the entirety of a given economy (Garrison’s system is a closed one and we will get into the implications of this later). Essentially, Garrison believes that a market left undisturbed by monetary (in modern times, central bank) manipulation will tend towards a series of potential equilibriae.
One must, however, not confuse this for some kind of conception of static equilibrium; Garrison explicitly rejects such an idea repeatedly and forcefully, as such a state of affairs inherently precludes the role of time in market forces, and thus the results of prior actions and anticipations of future actions (for the precise reasons that Lachmann does). Indeed, any economic theory that does not involve time cannot be correct. Garrison’s is instead a theory of a *dynamic tendency* towards the coordination of consumption and investment; of past market actions with future market desires. One who has read his work closely will realize that it is implicit that full equilibrium thereof may never be reached. Any free-market economist will concede that the market is not perfect; it is in fact its continual revealing of imperfections that makes it socially useful (recall Mises’s ideas of human action coordinating means with ends to “remove felt unease”).
Lachmann, of course, felt that those microeconomic tendencies that to equilibrate markets for individual goods are completely unhinged from any kind of macroeconomic long-term equilibration; what Garrison describes as his and Keynes’s ideas (unlabeled as such) of money and the market as a “broken joint,” as in a simple machine with two rods that move uncoordinated with each other, and for Keynes, thus inherently prone to disaster. However, Lachmann’s work also implies that current market configurations are made by subjective expectations of future states of the market, and economic action is intended to serve the wants and desires of the participants involved. It can be inferred from the “morphology” that Lachmann describes of capital markets that there actually is coordination, just not perfectly-equilibrating coordination, at least in the sense that static conceptions of “equilibrium” are meant to describe. Perhaps he is not of a pure “broken-joint” view of macro.
Lachmann, in fact, alludes to coordination of market resources, including time itself, at least in the short- and mid- run. What else could be the purpose of imagination and forecasting in Lachmann’s famous dictum, “The future is unknowable but not unimaginable?” Can markets even equilibrate in the short-term (the fisherman sells his full daily catch at the highest price it will fetch) if time destroys the usefulness of subjective expectations in the market? If it does, how can investors ever turn a profit if they can’t themselves provide an equilibrating mechanism, as Israel Kirzner so intriguingly illustrates? (Refer to my previous article, “Ludwig Lachmann’s Psychedelic Solitaire,” which I am to further explicate later.) Indeed, Lachmann agrees that there is microecomonic coordination, even though he recognizes the discoordinations; as does any Austrian, but he excels at it.
The answer, of course, is that Lachmann still has a gut feeling that there is something in the market that coordinates somewhere, albeit imperfectly, as anyone but the “tight-joint,” equilibrium-always/EMH/”rational” (perfect) expectations New Classicists would posit. Lachmann is, of course, still within the tradition of the “loose-joint” theorists that include Garrison, Mises, Hayek, the overwhelming majority of Austrians, and Friedmanite monetarists, as well as others.
Friedman, of course, believed that the economy is nearly always operating damn near the equilibrium of consumption and savings/investment that Garrison implied, but is “plucked away” by monetary contraction; this is the classic case of the Fed “falling asleep at the wheel,” also known as his plucking model. He never drew it himself, but Roger did.
The path is, of course, usually functioning near the periphery of the guns-and-butter curve, but is “plucked” away by the damage that any kind of substantial monetary contraction incurs. Friedman thought that this was the primary problem with central banks: they, like Keynes’s investors, “lose their heel” and let the economy fall apart. Of course, most Austrians dispute this story: the market, under the manipulation of a central bank, undergoes a series of booms-and-busts, not busts-then-booms (busts-then-recoveries), right?
Well, any Austrian with enough education in the theory will realize that the central bank (or whatever monetary authority) can intentionally pluck away the economy from the trend-line of consistent growth produced by the approximate equilibrium of consumption and investment produced by the market. Austrians merely submit that the contraction of the money supply that follows the expansion of the money supply is inevitable unless the government continues on to hyperinflation; hence why Garrison explains the theory as not one of all depression, but merely one of the “unsustainable boom.” However, for example, if some villain like one out of a comic book were to somehow disintegrate all of the gold on earth at a time when the economy was freely trading in gold, Austrians including Garrison and Lachmann, and Chicagoan monetarists in the vein of Friedman would surely agree that this would have the potential to cause a contractionary recession. Similarly, Chicago-schoolers, including Friedman himself, admit that there can be, and often is, a preceding (but small) uptick before the economy falls into depression, far inside the boundaries of what is possible to produce.
I am, however, getting ahead of myself. We must first reconcile Garrison’s mechanics of the approximate coordination of consumption and investment with Lachmann’s kaleidism and “equilibrium-never,” while also allowing for the faults of Friedman’s story to be explained by his heavy use of aggregation when looking at his empirical evidence (that would most likely otherwise provide support to the ABCT).
Garrison is a proponent of the story of the Austrians; that padding the supply of loanable funds leads to a seeming “boom” filled with malinvestments, one that cannot last because of the finite nature of resources that leads to the discovery of such malinvestments (and overconsumption). Friedman believes that any movement beyond the production-possibilities-frontier is merely nominal, and is simply reflected in price inflation (recall how he disputed the long-run accuracy of the Phillips curve). Lachmann thinks that the frontier can never be reached, and there may not even be a tendency towards it, though he would likely concede that it must exist; just as one cannot have their cake but also have already eaten it, so one may not keep their money-bought resources while also having consumed them. Indeed, Lachmann believes (and writes sympathetically to) the Austrians concerning the intertemporally destructive power of credit expansion, but not about any kind of equilibrating tendencies in the long run of the market. How can one argue that credit expansion harms intertemporal coordination of resources, while arguing that resources are not coordinated intertemporally otherwise?
The answer, perhaps, lies in the idea that there is no well-defined periphery of what can be produced between both consumption and production products. Put otherwise, the PPF is not perfectly defined, but rather an ever-indeterminate series of points, existing within a range but not definite within a perfect set of points; a gradient barrier, not a solid one, that increases unsustainability and instability the further it is pushed against.
Think of quantum mechanics and the idea of the “collapse” of the wave-function within the Copenhagen interpretation; the probability of finding a particle at a given point is indeterminate but not impossible to determine ex post: to make analogy, observation in the QM sense, like the revealing of the results of causation in the economic sense, necessarily reveals some outcome, though the path of events or probability of a particle’s location is unknowable beforehand. Yet think of how the consistent-histories interpretation solves the problems presented by the Copenhagen interpretation itself: causality, random due to human action and impossibility of measuring the myriad of variables involved in quantum decoherence, determines the outcome; the exact point where the PPF is met, and the location of the particle. Yet, there is a range within the particle or point of perhaps-unattainable equilibrium will fall, it is just not a determinate point or set of points. This is basically a direct analogy that works really well if you understand quantum mechanics, but if you just read this and said “What the fuck?” then fear not, because I will explain it further and without the quantum mechanics philosophy jargon.
Think about the double-slit experiment and intentional human action. Someone might rig up some experiment wherein people are surveyed before and after watching a video, one that is supposed to influence the results of the second survey, and the other a control where they are shown a video about cute kittens which would be intended to not let them change their positions on say, world hunger or whatever the survey is about. One would expect the outcome of the experiment to be obvious; the survey results change from the first to the second. but what if those surveyed have other motives? What if they think the surveyor is a jerk and decide to give random answers or answer the same way on both surveys? What if they decide that the video is stupid and it just makes them even more opposed to whatever wealth redistribution scheme is being proposed? What if those surveyed decide the experiment is stupid and not worth the ten bucks they’d get, so they leave? Human motivation for action is indeterminate, so you can never perfectly predict the results of the survey.
This example is is (abstractly) analogous to the double-slit experiment, wherein photons (“light particles,” if you will) are shot at a light-blocking plane with two slits in it. One might, quite naturally, expect a distribution of light that would be the highest behind each of the two slits, but instead, it comes out as a uniform, normal distribution. This is one way they teach that particles behave both as “little tiny bits of matter” (particles) and waves, at the same time. As anyone with the most cursory knowledge of quantum mechanics knows, the more you try to measure the momentum/spin/position/etc. of subatomic particles, the more unpredictable they become, because for some reason, the variables fuck it all up (Schrodinger’s equation and all that).
This is the exact reason that the precise barrier of the PPF cannot be calculated, or even be said to exist in some static sense: just a range of potential points, and a range of those ranges, hence the picture i re-drew. Of course, this picture is presented in a way that more represents the “collapse” of the “wave-function,” wherein a particle can be predicted to be within a given range at any given time, but is never known until observed… and all macroeconomic states resulting from prior action can only be known once time has passed and revealed them. If you’d like a graphical representation of what the graph would like like if thought of as what theorists of the “Copenhagen interpretation” called a “superposition” of states, this is a rough sketch:
This would surely not satisfy Friedman (who thought the economy was generally always at full employment) nor Lachmann (who thought that long-term macroeconomic stability could not exist, insofar as time destroys all expectations in the long run). So why include it? The reason is that it can be squared with their theories, if one allows for some minor tinkering.
Now let us shift our focus back to Friedman. As I mentioned earlier, Friedman conceded that a minor uptick in both consumption and investment could, and often does, arise just before a deflationary bust. Isn’t that exactly what the Austrian graph is saying, just with more emphasis on the preceding uptick than the monetarists’ following collapse (albeit a larger uptick)? More forcefully, Garrison reckons with Friedman by calling him out on his idea that the vast majority, if not all, movements beyond the PPF are purely nominal (as did Keynes to some extent) by bringing into play his theory of the “long and variable lag.” Eighteen to thirty months, Friedman said, is usually the time that it takes a rise in M (the money supply) to create a rise in P (the aggregate price level). Garrison points out the contradiction revealed when Friedman was questioned about why he suspects that the lag has such a length of time associated with it; Friedman gave this response:
It may be […] that monetary expansion induces someone within two or three months to contemplate building a factory, within four or five, to draw up plans, within six or seven, to get construction started. The actual construction may take another six months, and much of the effect on the income stream may come still later, insofar as initial goods used in construction are withdrawn from inventories and only subsequently lead to increased expenditure by suppliers.
That sounds, as Garrison aptly and immediately points out, like the Hayekian triangle used to symbolize the capital structure(!) Friedman actually abandons the outmoded and unrealistic stock-flow analysis for a realistic view of capital… that would imply that things like the real-cash-balance effect or the long-run Phillips-curve analysis or monetary disequilibrium are perhaps complements to, and in some ways merely aggregative mirrors of, the Austrian theory of the unsustainable boom! How Friedman could have ignored such an obvious link in his own thinking to that of the Austrians will perhaps forever remain a mystery, one likely only explained by his staunch aversion to deflation and obsession with a stable price level.
To be continued…