Even with Idle Resources, There Is a Misallocation of Resources in the Time Structure of Production when a Keynesian Stimulus is Used

Roger W. Garrison (2001) developed a framework to challenge the efforts of John M. Keynes (1936) and his followers, especially those bound to the IS–LM model. Garrison’s main contribution to this type of macroeconomic modeling is adding the time factor with the aid of the Hayekian triangle to represent a “time structure of production.” Garrison follows Hayek’s insight in pointing out that there can be a disequilibrium in the time structure of production even if the macroeconomic aggregates suggest full employment. Garrison’s model is mostly used to illustrate the effects described by the Austrian business cycle theory (ABCT) and to compare, within this model, the ABCT with other business cycle theories like monetarism and Keynesian theories.

Garrison’s framework, however, can be applied to scenarios other than a monetary policy-induced business cycle. In fact, Garrison (2001, chap. 5) remarks on the expected results of a fiscal, rather than monetary, policy. His model has been extended to different applications like the Phillips curve, equilibrium with unemployment, and open economies (Kollar 2008; Ravier 2011, 2013).

Keynesian policies, however, resort to fiscal policy and not only to monetary policy. The fiscal policy tool has remained largely understudied in Garrison’s framework. In this paper, we contribute to filling this gap in two ways. First, we use Garrison’s model to show the effects of fiscal policy rather than the usual effects of an expansionary monetary policy that derives from the ABCT. Second, we assume the presence of idle resources rather than starting from an assumed equilibrium with full employment. The reason for this is that Keynesian policies are assumed to be useful in the presence of idle resources, not in equilibrium, when the problem that Keynesian policies seek to fix is already solved. We demonstrate that Garrison’s model shows that even with idle resources, there is a misallocation of resources in the time structure of production when a Keynesian stimulus is put in place.

—Adrián O. Ravier and Nicolás Cachanosky, “Fiscal Policy in Capital-Based Macroeconomics with Idle Resources,” Journal of Private Enterprise 30, no. 4 (Winter 2015): 81-82.