Journal of Macroeconomics vol. 6, no. 2, 1984, pp. 197-213

Time and Money: The Universals of Macroeconomic Theorizing Roger W. Garrison A broad overview of the macroeconomic literature suggests that two objects of economizing behavior, time and money, are the universals, or common denominators, of macroeconomic theory. Explicit recognition of these universals allows for a fruitful comparison of Keynesians and Monetarists. The former tend to deny the possibility of a market solution to macroeconomic problems, while the latter tend to deny the problems themselves. Austrian macroeconomics, which consists of an integration of capital theory and monetary theory and lies between these two extreme positions, is used to assess recent developments in the mainstreams of macroeconomics. 1. Introduction

This paper suggests that macroeconomic propositions should be anchored in economizing behavior related to time and money, and that macromaladies stem from ways in which time and money interact in a market economy. Section 2 makes the case for according special status to the "market for time" and the "market for money" in macroeconomic theorizing. Section 3 argues that markets for capital goods, which serve as the focus of Austrian macroeconomics,(1) are the most direct and concrete manifestation of intertemporal markets. Section 4 introduces money as a 'loose joint" in the market mechanism, This Hayekian imagery allows for a fruitful comparison of Keynesians and Monetarists. Section 5 shows that these two mainstream views represent polar positions and that the Hayekian view, because of its particular treatment of time and money, represents the middle ground. Section 6 provides an elaboration of the Hayekian, or Austrian, view, and identifies its theoretical advantages. Section 7 considers related developments in the mainstreams, and Section 8 offers a summary and conclusion. 2. The Universals of Macroeconomic Theorizing

Much has been written about the need for a microeconomic foundation for macroeconomic theorizing.(2) There has been little effort, though, to identify just what it is that sits on this foundation. Interpreting the prefix "macro-" to mean economywide suggests the need to identify economizing behavior whose effects are economywide in some special sense. The Walrasian insight that everything depends upon and influences everything else is a reminder of how encompassing the notion of economywide can be. But the attempt of market participants to economize on time and on money and the economywide consequences of this economizing behavior have a special claim on our attention. It is argued below that the "market for time" and the "market for money" both in their conceptual isolation and in their actual interaction, give rise to all the phenomena that are conventionally regarded as macroeconomic in nature.

The most explicit recognition of the universal nature of time in economic theory is found in the writings of the Austrian school.(3) All choices are made with an eye to the future, and all actions take place in time. While there is no market for time as such, the time element is inextricably wedded to every market that does exist. The analysis of a market economy consists of identifying actions of individuals that give rise to various market phenomena, and time, literally, is the medium through which these actions transpire.

The common practice in microeconomics, particularly in Walrasian general-equilibrium theory, of limiting the subject matter to the case of a pure exchange economy is an attempt to abstract from the time element. The simple act of exchange can be conceptually collapsed into a single instant of time without any serious distortion. But the (timeless) models which consist of nothing but various constellations of such exchanges bear little resemblance to the economy being modeled.(4) In modern market economies the more relevant�and troublesome�considerations of time are associated not with pure exchange but with production. Acts of production, though, cannot be conceptually collapsed into a single instant of time without negating an essential aspect of all production processes.

Explicit attention to the time element associated with production decisions and production processes can serve to distinguish macroeconomic theory from conventional general-equilibrium theory and to give the theory its distinct macroeconomic flavor. Considerations of time may enter the theory by way of the cost of information about an uncertain future (as in the Chicago-UCLA tradition), the sluggishness of money wages or prices (as in the Keynesian approach), or the capital structure (as emphasized by the Austrian school). In any case the intertemporal relationships among individual choices in a production economy is the stuff of which macroeconomic theory is made. Alternative macroeconomic theories, whatever their particulars, consist of different explanations of the behavior of individuals in their attempt to "defeat the dark forces of time and ignorance which envelop our future."(5) But further inquiry into the particulars of intertemporal markets must await a brief discussion of the second universal of macroeconomic theorizing.

Though it may be thought unnecessary to argue the centrality of money in macroeconomic theory, it is worthwhile to consider the special sense in which money is an economywide phenomenon. Monetary theorists have long recognized that "money has no market of its own."(6) It is the obverse of this truth that highlights the macroeconomic character of money. With trivial exceptions every market is a market for money. In a modern economy every exchange involves some specific quantity of money. That this fact should be the focus of our attention has been recognized by economists both new and old.(7) There is no denying, of course, that money serves several functions, as listed in any principles text, but the presence of money on one side of each exchange in every market is the special sense in which money is an economywide phenomenon.

The particular reason that money is singled out for special attention is not just a matter for idle reflection. It has important implications about the particular way that money is to enter into a satisfactory macroeconomic theory. As with the treatment of the time element, the way that money is introduced�e.g., as a non-interest-bearing asset, as a hedge against rising interest rates, or as the medium of exchange�accounts for many of the major differences between competing theories. And the role that money plays in a given macroeconomic model provides clues about the model's ability to explain macroeconomics phenomena.

Time is the medium of action; money is the medium of exchange. Together these two media can serve to define macroeconomics. If the intertemporal exchanges and the interpersonal exchanges in a market economy could be isolated one from the other, conventional macroeconomics would be largely redundant. Cambridge capital theory (which abstracts from interpersonal exchanges) coupled with Walrasian general-equilibrium theory (which abstracts from intertemporal exchanges) would adequately cover the field. The fact that these two categories of economic theory, taken together, shed no light whatever on the conventional macroeconomic issues is evidence of the extent to which intertemporal exchanges and interpersonal exchanges are in fact intertwined. And it is precisely the intersection of the "market for time" and the "market for money" that constitutes macroeconomics' unique subject matter. 3. Capital and Time

Economics in general is concerned with the allocation of resources. Thus, the most general and direct way of dealing with the time element is to focus on those resources that bear a distinct intertemporal relationship with one another in the minds of market participants. We have it from William Stanley Jevons (1970, p. 226) that "the single and all-important function of capital is to enable the laborer to await the result of any long-lasting work�to put an interval between the beginning and the end of enterprise." Jevons is suggesting that one way of concretizing the notion of the "market for time" is to recognize the essential temporal aspect of the market for capital goods broadly conceived. Again, the most explicit effort to intertemporalize economic theory by focusing on capital goods and to build a macroeconomic theory on a foundation of capital theory is found in the Austrian school. Menger (1970, pp. 149-174) introduced the idea of "goods of various orders" where order denotes a temporal relationship between a capital good and the eventual consumer good that this piece of capital helps to produce. Böhm-Bawerk (1959, vol. 2, pp. 102-118) provided a description of what goes on during the interval of time referred to by Jevons and how the assortment of capital goods must be restructured if that interval is to be shortened or lengthened. This early work of capital theory provided a foundation for later developments by Mises (1953, pp. 339-366; 1966, pp. 538-586), Hayek (1967, pp. 69-100; 1979, pp. 139-192), and others writing in the Austrian tradition.

In the 1930s this direct and general approach to dealing with the problem of intertemporal coordination had to compete with the Keynesian revolution. It would be constructive if the Austrian formulation of capital theory could be compared to an alternative formulation offered by Keynes. But this is not possible. Keynes (1964, pp. 213-217) dismissed the contribution of Böhm-Bawerk out of hand but offered no alternative of his own.(8) The objective instead, was to press on with macroeconomic theory in the absence of any underlying theory of capital The effect of Keynes's contribution is neatly summarized by Axel Leijonhufvud (1968, p. 212) The theory of capital and interest was the subject of great debate in the early thirties.... [But the] issues were not resolved. Keynes's General Theory had the effect of cutting the debate short. The capital-theoretic controversies were buried under an avalanche of pro-, anti-, and (soon enough) post-Keynesian writings, and the issues were to remain in abeyance for some twenty years. Thus, Keynesianism represents an emancipation of macroeconomic thought from the thorny issues of capital theory, but it also represents the abandonment of the most direct approach for dealing with the element of time.

It is not argued here that Keynes eliminated the time element from his theory. To the contrary, considerations of time loom large throughout the entire book. But to account for the particular ways in which time is taken into consideration would embroil us in controversies that are yet to be resolved forty-odd years after the book's publication. Most significant is the very lack of any such resolution. In the relevant passages discussions of capital goods or the capital structure seem to be replaced by allusions to "casinos" and "musical chairs" (1964, pp. 156, 159). Some kind of speculation about the future is necessitated by his theory, but when the "animal spirits (1964, pp. 161) of Keynesian investors are pitted against the "dark forces of time and ignorance," the dark forces seem always to win out. This characteristic of Keynesian theory follows directly from the rejection of the capital theory that had served in pre-Keynesian formulations as the embodiment of the "market for time." 4. Money as a "Loose Joint"

Intertemporal market forces find their most direct and concrete expression in the market for capital goods. If capital goods were traded directly for consumer goods or for other capital goods, the nature of macroeconomics would be substantially different from what it is. The fact that capital goods and the corresponding consumer goods are traded indirectly via the medium of exchange adds the other essential dimension. Macroeconomic theory, then, should highlight the implications of indirect exchange in the context of a capital-using economy.

In the closing pages of The Pure Theory of Capital (1941, pp. 408-410), Hayek provides a piece of imagery that hints about how the "pure theory" might be qualified with monetary considerations. Money is conceived as the "loose joint" in the self-equilibrating market system. The fact that money is a joint linking the ability to demand with the willingness to supply gives meaning to Say's Law correctly understood. The fact that the joint is a loose one keeps Say's Law from being true in the vulgar sense. The play in the system associated with the use of money allows for deviations between the quantities of nonmonetary goods supplied and the quantities demanded. Recognizing money as the loose joint in the context of a capital-using economy focuses attention on the looseness between the supply of an assortment of capital goods and the subsequent demand for the corresponding consumer goods. It is this looseness that gives rise to the most common macroemaladies, such as "overinvestment," or what the Austrian writers call "malinvestment." (More on these phenomena later).

Many macroeconomic theories accord money a central role. Hayek's imagery provides an acid test for the adequacy of these theories. The conception of money as a loose joint suggests that there are two extreme theoretical constructs to be avoided. To introduce money as a "tight joint" would be to deny the special problem of intertemporal coordination. Macroeconomic models with tight-jointed money serve to collapse all exchanges, whether intertemporal or atemporal, into a timeless general equilibrium framework. At the other extreme, to introduce money as a "broken joint" would be to deny even the possibility of a market solution to the problem of intertemporal coordination. In a world of broken Jointed money, prices could not conceivably transmit information about the desired allocation of resources over time or provide the correct incentives for such a desired allocation to be actualized. In short, the concepts of tight-jointed money and broken-jointed money serve to deny, respectively, the central macroeconomic problem and its solution. It will be argued below that the mainstreams of macroeconomic thought, Monetarism and Keynesianism, have tended to adopt one of the two polar positions with the result that, as a first approximation, macroeconomic problems are seen to be either trivial or insoluble. Between theses extreme conceptions is Hayek's notion of loose-jointed money, which serves to recognize the problem while leaving the possibility of a market solution to it an open question.(9) 5. The Mainstreams of Macroeconomics

That the monetary mechanism is an essentially loose one is precisely the fact that is ignored in one of the two mainstream views. It may be instructive to consider the writings of Knut Wicksell (1936, pp. 122-156) as an early example of tight jointed macroeconomic models. Wicksell's formulation is singled out because of its praiseworthiness on other counts. It incorporates a modified version of Böhm-Bawerk's capital theory and thus takes due account of the time dimension of economic activities. And his formulation squares with the ultimate truth of the quantity theory. But while Wicksell is generally credited with having integrated monetary theory and value theory, this is precisely what he did not do.(10) His model was so constructed that, in the simplest case, all prices, driven by the real-cash-balance effect, moved up and down together. In instances when it was recognized that some prices may (temporarily) increase more than others, no corresponding quantity changes were allowed. The result was that the Wicksellian model obscured all the ways in which the "market for money" and markets for capital goods interact and focused instead on the relationship between the total quantity of money and the general level of prices.(11) But, of course, a theory that truly integrated monetary theory and value theory would have to focus on those very interactions that Wicksell's formulation assumed away.

Modern developers of Wicksell's formulation have recognized that the real-cash-balance effect is the only link in that formulation between the real and the monetary factors. Even though the equilibrating forces were originally described in the context of a quasi-Böhm-Bawerkian capital structure, the monetary forces were never allowed to impinge on the intertemporal relationships reflected in the existing structure of capital goods. Monetary considerations and value consideration were kept segregated by the assumption�sometimes explicit, sometimes implicit�of tight jointed money. And it is precisely this segregation of monetary and value theory that allows modern theorists, such as Don Patinkin (1965, pp. 199-213), to replace the complex intertemporal structure of production and its output with a single aggregate labeled "commodities." Simplifying the formulation in this way transforms the assumption of tight-jointed money into the equivalent assumption that nothing of relevance to macroeconomics is taking place within the commodities aggregate. Clearly, those who see loose-jointed money as the ultimate source of all the troublesome macroeconomic phenomena will see that Patinkin's analysis is trivial in this context.(12)

While the notion of tight-jointed money trivializes macroeconomic problems, the opposing notion of money as a broken joint renders them insoluble. This opposing polar assumption, however, lies at the root of the second mainstream. Keynes denied the applicability of Say's Law to a monetary economy and chided his contemporaries for "fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption..."(1964, p. 21). Keynes saw the money rate of interest, which his contemporaries took to be a loose intertemporal link, as a "current phenomenon" (1964, p. 146). The perceived absence of any mechanism in a monetary economy which could conceivably achieve intertemporal coordination of economic activities explains how Keynes could summarily dismiss the theory of capital devised by Böhm-Bawerk without seeing the need to replace it with some other comprehensive view of capital. The relationships between the various elements of the capital structure were simply no part of his theory. Instead, it was only by "accident or design" (1964, p. 28)�as opposed to the outcome of an undesigned order�that the economy achieved macroeconomic coordination. That is, with the assumption that money constitutes a broken joint, a market solution to macroeconomic problems is beyond the pale.

Viewed from this perspective the macroeconomic theory offered by Hayek and other members of the Austrian school represents a middle-ground position.(13) At the same time it constitutes a radical position�radical in the sense of going to the root of the matter. The following section provides a broad outline of the Austrian view and the penultimate section evaluates some modern advancements in mainstream views in the light of this outline. 6. Austrian Macroeconomics

As was noted earlier, indirect exchange in a pure exchange economy allows for some discrepancies�some looseness�between the supply of goods and the demand for goods. But excess supplies and demands in such an economy are simple in nature and can be eliminated in a relatively painless way through simple price changes that alter relative prices and possibly the general price level as well. Apart from adjustments in real cash balances, the market process in a pure exchange economy is of very little interest to macroeconomists.

The implications of a loose monetary joint grow in complexity when the setting is generalized to allow for goods of various orders�to use the Mengerian terminology. The constellation of capital goods that facilitate production is the embodiment of the time element in the production process. In this setting the availability of the goods that characterized the pure exchange economy is preceded by as sequence of exchanges of goods of "higher order"�plant and equipment, raw materials, goods in process. This sequence of exchanges gives leverage to the looseness of the monetary joint. For example, an excess of higher-order goods that are several steps removed from the emergence of consumer goods (e.g. lumber destined for use in the construction industry) may not be seen immediately as an excess at all. Such a perception depends critically on entrepreneurial forecasts of future consumer demand. And erroneous forecast may not be revealed before the creation of corresponding excesses in the subsequent stages of the production process. But in accordance with Say's Law, the excesses will eventually reveal themselves. Although the revelations could take any of a number of forms, in the Austrian literature it usually takes the form of a (relative) shortfall of capital goods needed to complete the production process.(14) This particular scenario emphasizes the notion of intertemporal complementarity among different kinds (orders) of capital goods. The significant point is that the excess supplies and demands, once revealed, are not remedied in any simple manner. The necessary adjustments may involve a fundamental restructuring of the economy's production process. The looseness of the monetary joint, in effect, has allowed for a certain amount of intertemporal discoordination to go unperceived for a period of time. The resulting "malinvestment" consists of an overinvestment of some kinds of capital (typically, long-term capital goods) and an underinvestment of other kinds (typically, short-term goods). Not surprisingly, the market process that corrects for this economywide malinvestment can be a long and painful one. The looseness of the monetary joint that allows discoordination to arise in the first place precludes a quick and painless remedy.

The Hayekian theory contains an implicit criticism of practically all mainstream theories. It warns against making a stipulative distinction between structural unemployment and cyclical unemployment. The mainstream approach is to abstract from the structural component of unemployment in order to focus more clearly on the cyclical component; the Austrian approach recognizes that cyclical unemployment can arise from a discoordinated capital structure.(15)

Further, the Austrian view has clear implications about the broadly conceived goals of macroeconomic policy. Policymakers should recognize that inherent looseness in the system and should abstain from any actions that would further weaken the loose joint or render the inherent looseness more difficult to deal with. Space does not permit a full consideration of alternative policy schemes, but there is room for a broad generalization. The conceptualization of money as a loose joint strengthens our intuition that discretionary policy is likely to exacerbate the problems that stem from the loose-jointedness of the system. Hayek (1941, p. 408) issued an early warning against such policies. [M]oney by its very nature constitutes a kind of loose joint in the self-equilibration apparatus of the price mechanism which is bound to impede its working�the more so the greater the play in the loose joint. But the existence of such a loose joint is no justification for concentrating attention on that looseness and still less for making the greatest possible use of the short-lived freedom from economic necessity which the existence of the loose joint permits. This passage captures the flavor of modern writings within Austrian tradition and anticipates in a significant way the essential aspect of many modern developments. The Hayekian view is consistent with the Public-Choice view of policy decisions, the notion of the political business cycle, and the Chicago-originated analysis that hinges on the distinction between the short- and the long-run Phillips curve.(16) 7. Related Developments in the Mainstreams

In the interest of contrasting the mainstream views with those offered here, the former were presented in their polar forms. Apart from matters of style and attention to the real-cash-balance effect, Patinkin's macroeconomics is a specimen of Ricardian long-run analysis. The objective is to compare the characteristics of successive states of equilibrium which are separated by a period of time sufficiently long for the economy fully to adjust to all parametric changes. Changes in the relative prices and quantities of different kinds of capital goods or other productive factors during the equilibrating process are never brought into view.(17)

At the other end of the spectrum is the extreme Keynesian view. With no effective intertemporal link (money is a broken joint), the analysis focuses exclusively on the short run. The long run, in this view, is nothing more than an unending sequence of short runs each with its own equilibrium (or disequilibrium) solution. Long-run truths, such as those implied by the quantity theory, do no "fall out of" Keynesian models but rather have to be "forced into" them. Analyses based on these models are wholly inadequate for showing how the market adjusts over time to parametric or policy changes.

Clearly, the frontiers of macroeconomics lie somewhere between the two extreme views. Somewhere between the short run and the long run is the relevant run, the run in which all the macromaladies manifest themselves, and hence the run in which these phenomena must be analyzed. Modern attempts to get at the relevant run, that is, to take both short-run and long-run considerations into account, differ in terms of which of the two polar positions is adopted as the starting point and what particular device is introduced to allow some movement toward the other pole. While any number of individual contributions illustrating this general approach could be cited, it will be convenient to focus attention on two articles, one by David Laidler (1975), the other by Paul Davidson (1980). These particular articles deserve to be singled out in part because each of the two authors is clearly identifies with one of the mainstream views, and in part because both of the articles explicitly recognize the centrality of time and money in macroeconomic analysis. This facilitates a comparison between the mainstream approaches and the Austrian approach as outlined above.

Quoting selectively from the Laidler article can establish that Laidler correctly perceives the fundamental importance of time and money. One time: "Once they are committed to a certain course of behavior, economic agents may not instantaneously and costlessly change that commitment; thus the passage of time and its irreversibility are matters of paramount importance in understanding economic activity" (1975, p.5). On money: "there is no unique market for money, and its 'price' emerges as a result of economic agents each setting the price of a particular good he is supplying in terms of money" (1975, p.7). But Laidler is working within the quantity-theory tradition�a tradition that adopts as its starting point (and sometimes its ending point) the assumption that enough time is allowed to elapse so that the unique effects of money are fully dissipated. Some analytical device is needed that will transform his long-run analytical framework into a framework that can deal with the interplay between time and money. He needs to shorten the long run, to loosen the tight joint of money. The device Laidler employs is the one whose development is associated with the same tradition�the market for information. By taking into account the simple fact that information about the uncertain future is not costlessly available, Laidler is able to deal with the phenomena that characterize the relevant run. The time dimension, in effect, is captured, at least in part, by the market for information. The interaction between this market for information and the market for money constitutes what Laidler refers to as "the new microeconomics." And he clearly recognizes the payoff of this approach. "It is the peculiar contribution of the new microeconomics to macroeconomics that it explains the time path of prices and their potential incompatibility with full employment as a result of rational behavior in the face of imperfect and costly information that is inherent in a market economy" (1975, p. 74).

In the above capsulization of the approach that Laidler outlines, the market for information is somewhat contentiously referred to as a "device." This characterization is intended to suggest that the "new microeconomics" does not deal with the relevant run in the most fundamental or direct way. The actual "market for information"�even when conceived broadly to include education, consulting services, advertising, and all printed matter�consists of a circumscribed set of activities. Though important, the analysis of this market (or these markets) belongs to the realm of the "old microeconomics." In order to transform the notion of the "market for information" into a macroeconomic concept the term has to be taken in a metaphorical sense. In any transaction involving any good the buyer is also "buying information" about the price at which the seller is actually willing to sell, and "selling information" about the price he is actually willing to pay.(18) Transactions involving particular goods may imply the "buying" and "selling" of other kinds of information as well, For instance, in buying a tiller the buyer "sells" information about the future demand for reapers.

Identifying the metaphoric character of Laidler's "market for information" facilitates a comparison between this particular approach and the one adopted by the Austrian school. It suggests that the Austrian approach is the more fundamental and direct. Markets that actually exist are markets for goods and services. Money is taken into account by recognizing that each of the goods and services is exchanged for money. The two approaches are equivalent in this respect. Time is taken into account in the Austrian tradition by recognizing the intertemporal relationship among the different goods and services. This approach requires a theory of capital and an understanding of the economy's structure of production. It is true that the passage of time implies the existence of uncertainty which gives rise to a "market for information," but it does not follow that incorporating the market for information into macroeconomics takes full account of the time dimension. The fundamental intertemporal relationship between tillers and reapers, for instance, is not captured by this approach. Uncertainty is a weak proxy for time. The "market for information" is best viewed as a device for venturing into the relevant run without having to grapple with capital theory and hence with the more fundamental intertemporal relationships among the various objects of exchange.

Paul Davidson's article is, in an important sense, the Keynesian counterpart to Laidler's. In a section titled "The importance of money" (1980, p. 164), Davidson discusses indirect exchange in the context of the passage of time. He is clearly attempting to get at the macroeconomics of the relevant run. The subject matter is the same as in the Laidler article. But Davidson is working in the tradition of the other mainstream. Where Laidler needed to loosen a tight monetary joint, Davidson needs to create a joint where none existed; where Laider needed to shorten the long run, Davidson needs to lengthen the short run. The device that Davidson employs is the money-wage contract (1980, pp. 164-167). It is primarily this particular intertemporal exchange that keeps the passage of time from being nothing more than a sequence of unrelated short runs. In Davidson's own words: "In a decentralized market economy ... moving irresistibly through historical time into the uncertain future, forward contracting for production inputs is essential to efficient production planning. And the most ubiquitous forward contract of all in such an economy, so long as slavery and peonage are illegal, is the money-wage contract" (1980, pp. 165f). Where Laidler attempted to capture the time dimension in the market for information, Davidson attempts to capture it in the forward market for labor.

The term "device" is as appropriate in describing Davidson's formulation as it was in describing Laidler's. Although labor markets span the entire economy, the forward dealing in these markets is only one of many ways that intertemporal exchange takes place. Contrary to Davidson's suggestion, there is no reason that this particular type of intertemporal transaction should be singled out for special treatment. Goods and services in general are related to one another over time. The general theory of the nature of these intertemporal relationships and of how these relationships may be affected by parametric or policy changes is what constitutes capital theory. But capital theory is precisely what is lacking in both mainstreams. The "money-wage contract" is best viewed as Davidson's device for venturing into the relevant run (venturing in to meet Laidler, who has ventured in from the other direction) without having to deal in any general way with the basic issues of capital theory.

8. Summary and Conclusion

To recognize time and money as the universals of macroeconomic theorizing is to define the domain of macroeconomics as the interaction of the "market for time" and the "market for money." This conception of macroeconomics, which has merit in its own right, allows for a fruitful comparison of mainstream views. It points to the indirectness with which the mainstream theories deal with the time element. The practice of using weak surrogates for the time dimension, such as the market for information or the forward market for labor, causes the more fundamental intertemporal relationships, as spelled out in Austrian capital theory, to be overlooked.

The inadequacies of the two mainstreams are identified in a way that suggests the appropriate remedy. Since the Keynesian revolution the development of macroeconomics (by both Keynesians and Monetarists) has proceeded in the absence of any coherent theory of capital. The present paper suggests that the reincorporation of capital theory into macroeconomics would pave the way toward a more fundamental treatment of the time element and a reconciliation of the two mainstream views. References Bellante, D. "A Subjectivist Essay on Modern Labor Economics." Managerial and Decision Economics. 4 (December 1983): 234-243. Birch, D. E., A. A. Rabin, and L. B. Yeager. "Inflation, Output, and Employment: Some Clarifications." Economic Inquiry 20 (April 1982): 209-221. Böhm-Bawerk, E. Capital and Interest. 3 vols. South Holland, IL: Libertarian Press, 1959. Clower, R. W. "A Reconsideration of the Microfoundations of Monetary Theory." Western Economic Journal 6 (December 1967): 1-9. Davidson, P. "Post Keynesian Economics." Public Interest (Special Issue, 1980): 151-173. Garrison, R. W. "Austrian Economics as the Middle Ground: Comment on Loasby." In Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises. I. M. Kirzner, ed. Lexington, MA: Lexington Books, 1982, 131-38. ________. "Austrian Macroeconomics: A Diagrammatical Exposition." In New Directions in Austrian Economics. L. M. Spadaro, ed. Kansas City: Sheed, Andrews, and McMeel, 1978, 167-204. Hahn, F. "General Equilibrium Theory," Public Interest (Special Issue, 1980): 123-138. Hayek, F. A. Monetary Theory and the Trade Cycle. New York: Augustus M. Kelley, 1975. ________. Prices and Production. 2nd ed. New York: Augustus M. Kelley, 1967. ________. The Pure Theory of Capital. Chicago: University of Chicago Press, 1941. ________. "The Use of Knowledge in Society." American Economic Review 35 (September 1945): 519-530. Hutt, W. H. The Keynesian Episode. Indianapolis: Liberty Press, 1979. Jevons, W. S. The Theory of Political Economy. Middlesex: Penguin Books, 1970. Keynes, J. M. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace, and World, 1964. Laidler, D. E. W. "Information, Money and the Macroeconomics of Inflation." In his Essays on Money and Inflation. Chicago: University of Chicago Press, 1975. Leijonhufvud, A. On Keynesian Economics and the Economics of Keynes. New York" Oxford University Press, 1968. ________. "The Varieties of Price Theory" What Microfoundations for Macro Theory?" UCLA Discussion Paper, No. 44, 1974. Lewin, P. "Perspectives on the Cost of Inflation." Southern Economic Journal 48 (January 1982): 627-641. Lutz, F. A. "On Neutral Money." In Roads to Freedom: Essays in Honor of Friedrich A. von Hayek. E. Streissler, G. Haberler, F. A. Lutz, and F. Machlup, eds. London: Routledge and Kegan Paul, 1969. Menger, C. Principles of Economics. New York: Free Market Press, 1950. Mises, L. Human Action: A Treatise on Economics. 3rd rev. ed. Chicago: Henry Regnery, 1966. ________. The Theory of Money and Credit. New Haven: Yale University Press, 1953. O'Driscoll, G. P., Jr. "Rational Expectations, Politics, and Stagflation," In Time, Uncertainty, and Disequilibrium. M. J.Rizzo, ed. Lexington, MA: Lexington Books, 1979. ________. And M. J. Rizzo with R. W. Garrison. The Economics of Time and Ignorance. Oxford: Basis Blackwell, 1985. Patinkin, D. Money, Interest, and Prices. 2nd ed. New York: Harper and Row, 1965. Schumpeter, J. A. History of Economic Analysis. New York: Oxford University Press, 1954. Wicksell, K. Interest and Prices. London: Macmillan, 1936. Yeager, L. B. "Essential Properties of the Medium of Exchange." Kyklos 21 (January/March 1968): 45-68. Notes 1. See Hayek (1967), Garrison (1978), and O'Driscoll and Rizzo (1985), 2. Major contributions to this literature include Clower (1987) and Leijonhufvud (1974). For recent Austrian-oriented contributions, see O'Driscoll (1979) and Lewin (1982). 3. See, for instance, Böhm-Bawerk (1959, vol. 2, pp. 259-289) and Mises (1966, pp. 99-104, 479-537, and passim). 4. Efforts to reintroduce the time dimension in some artificial way-such as by defining the different goods of a general-equilibrium model partly in terms of the time they are available for consumption-have served to obscure rather than resolve the difficulties associated with the time element. For a candid recognition of this and other limitations of general equilibrium theory, see Hahn (1980). 5. This imagery, of course, is from Keynes (1964). 6. For early attention of this aspect of a monetary economy, see Mises (1953). More recently, this aspect has received due attention from Yeager (1968) and Birch, Rabin, and Yeager (1982). 7. In laying the "foundations of monetary theory," Clower (1967, pp. 207f) offers the idea in the form of an aphorism: "Money buys goods and goods buy money, but goods do not buy goods. This restriction is-or ought to be-the central theme of the theory of a money economy" (emphasis in the original). To recognize the validity and importance of Clower's aphorism is to endorse the assessment that Whilhelm Roscher, founder of the early historical school, made over a century ago. All false theories of money fall into one of two categories: those that take money to be something more than the most saleable of all commodities, and those that take it to be something less. See Schumpeter (1954, p. 699). 8. Keynes's "Sundry Observations of the Nature of Capital" (1964, pp. 210-221) do not add up to a coherent theory of capital. 9. It might be noted that the assumption of tight-jointed money is not to be condemned in all contexts. This assumption gives meaning to the notion that "money is a veil." It allows us to identify the underlying general-equilibrium relationships with which any theory, macroeconomic or otherwise, must ultimately be reconciled. The assumption of tight-jointed money also allows us to defend the kernel of truth in the quantity theory of money. At the same time the need to make this assumption warns us of the limited applicability of the simple quantity theory. But all the interesting macroeconomic phenomena, which manifest themselves as economywide coordination failures, depend critically on the fact that real-world money is not of the tight-jointed variety. 10. For a corroboration assessment of the "post-Wicksellians," see Hutt (1979, p. 117). 11. Hayek (1975, pp. 109-116) was critical of Wicksell for his undue attention to the general price level. 12. See, for instance, the criticisms of Lutz (1969, pp. 115-16). 13. For a general view of Austrian economics as a middle-ground position, see Garrison (1982, pp. 131-38). 14. See Hayek (1967, pp. 54-60). 15. For development of this contrast between the mainstream and Austrian views, see Bellante (1983). 16. Although Milton Friedman made the short-run/long-run distinction in terms of the Phillips curve in his 1967 AEA presidential address, the distinction itself and its relevance to monetary policy are prominent in the early works of Mises (1953) and Hayek (1967, 1975). I am indebted to an anonymous referee for making this point. 17. In its polar form, Patinkin-type macroeconomics comes complete with a modern analog of the Ricardian vice: In effect, the analysis that is only applied after the dust has settled is used to suggest that there is no problem with dust. 18. This is the sense in which prices are "signals" and the market is a "communications network." See Hayek (1945).

