Hayek, in his detailed critique of both volumes of Keynes’s A Treatise on Money (1930), accuses Keynes of entirely ignoring the theory of capital and interest, particularly the work of Böhm-Bawerk and the other theorists of the Austrian School in this regard. According to Hayek, Keynes’s lack of knowledge in this area accounts for the fact that he overlooks the existence of different stages in the productive structure (as Clark had done and Knight later would) and that he ultimately fails to realize that the essential decision facing entrepreneurs is not whether to invest in consumer goods or in capital goods, but whether to invest in production processes which will yield consumer goods in the near future or in those which will yield them in a more distant future. Thus Keynes’s notion of a productive structure comprised of only two stages (one of consumer goods and another of capital goods) and his failure to allow for the temporal aspect of the latter, nor for the consecutive stages which compose it, leads him into the trap of the “paradox of thrift,” the fallacious theoretical rationale which we explained in chapter 5.⁷⁶
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⁷⁶ It is important to remember that John Maynard Keynes himself explicitly and publicly admitted to Hayek that he lacked an adequate theory of capital. In Keynes’s own words:
Dr. Hayek complains that I do not myself propound any satisfactory theory of capital and interest and that I do not build on any existing theory. He means by this, I take it, the theory of capital accumulation relatively to the rate of consumption and the factors which determine the natural rate of interest. This is quite true; and I agree with Dr. Hayek that a development of this theory would be highly relevant to my treatment of monetary matters and likely to throw light into dark corners.
—Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stoup (Auburn, AL: Ludwig von Mises Institute, 2006), 560-561, 561n.
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