Time and Money Are the Common Denominators of Macroeconomic Theorizing

To base macroeconomics on capital theory — or, more precisely, to base it on a theory of the market process in the context of an intertemporal capital structure — is to maintain a strong link to the ideas of the Austrian School. Entrepreneurs operating at different stages of production make decisions on the basis of their own knowledge, hunches and expectations, informed by movements in prices, wages, and interest rates. Collectively, these entrepreneurial decisions result in a particular allocation of resources over time.

The intertemporal allocation may be internally consistent and hence sustainable, or it may involve some systematic internal inconsistency, in which case its sustainability is threatened. The distinction between sustainable and unsustainable patterns of resource allocation is, or should be, a  major focus of macroeconomic theorizing. Systematic inconsistencies can cause the market process to turn against itself. If market signals — and especially interest rates — are “wrong,” inconsistencies will develop. Movements of resources will be met by “countermovements,” as recognized early by Ludwig von Mises ([1912] 1953). What initially appears to be genuine economic growth can turn out to be a disruption of the market process attributable to some disingenuous intervention on the part of the monetary authority.

Though committed to the precepts of methodological individualism, the Austrian economists need not shy away from the issues of macroeconomics. Some features of the market process are macroeconomic in their scope. Production takes time and involves a sequence of stages of production; exchanges among different producers operating in different stages as well as sales at the final stage to consumers are facilitated by the use of a common medium of exchange. Time and money are the common denominators of macroeconomic theorizing. While the causes of macroeconomic phenomena can be traced to the actions of individual market participants, the consequences manifest themselves broadly as variations in macroeconomic magnitudes. The most straightforward concretization of the macroeconomics of time and money is the intertemporal structure of capital — hence, capital-based macroeconomics.

—Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 33-34.