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Time and Money: The Macroeconomics of Capital Structure by Roger W. Garrison

Robert Batemarco

Routledge • 2001 • 272 pages • $99.00

Reviewed by Robert Batemarco

Although it was Tolstoy who said that “the highest wisdom has but one science—the science of the whole,” these words express with uncanny accuracy the practice of the Austrian school of economics. One of the hallmarks of that school is that it sees economics as an integrated whole, with a few initial principles underpinning every theory. It is in this spirit that Roger Garrison of Auburn University has written Time and Money, an in-depth exploration of Austrian, Keynesian, and monetarist macroeconomic theory. The three principles Garrison deploys as the launching pad for his excursion into these issues are scarcity, the market for loanable funds, and the time structure of production. Each is represented throughout this work by a simple diagram—production possibilities frontiers, supply and demand curves, and Hayekian triangles, respectively. Tying these together enables Garrison not only to furnish a standard account of the Austrian (that is, Mises-Hayek) theory of business cycles, but also to draw other implications of Austrian macroeconomics as well as to obtain penetrating insights regarding the nature of Keynesian and monetarist alternatives.

Another comparison of various macroeconomic paradigms may sound to many economists like flagellation of an expired equine. Yet Garrison rises above such potential ugliness and draws a number of fresh insights. One of these may be a triumph of style over substance—but in a good way. His coining of the term “capital-based economics” not only captures one of the most important distinctions between the Austrian approach to macroeconomic theorizing and its rivals, but may also be a public relations coup as well. Just as the “supply-side” designation effectively pointed out a fundamental deficiency of the Keynesian approach and re-popularized a basic truth that had gone out of fashion, Garrison’s use of the term “capital based” points to another shortcoming of conventional analysis and has the potential to lend new appeal to bygone verities.

Garrison uses his graphical tools judiciously. He takes them as far as they are applicable, but no further. Yet the graphics employed in Time and Money are not mere window-dressing. Their role is twofold: demonstrating the coherence of the Austrian vision and exposing the limited scope of its Keynesian and monetarist rivals. They permit us to see that those two paradigms are really special cases of the Austrian theory, obtained by disabling or ignoring the market mechanisms that, when functioning properly, align the capital structure with consumer desires.

It is a tribute to his powers of analysis that Garrison can do this without resorting to caricatures of those theories. Rather, he treats the theories of Keynes and Friedman fairly, frequently using their own words by way of exposition, and examining several versions of each of their models. One of the more interesting lessons to emerge from this procedure is that Keynes’s theory of unemployment had both cyclical and secular components, with the latter having even more statist implications than the former. His critique of monetarism is less severe, finding that framework to be more incomplete than erroneous; indeed, he sees Austrian economics and monetarism as complementary approaches, each useful in helping us to understand different situations.

A major strength of this book is its avoidance of one-dimensional analyses. The author incorporates into many parts of this work the recognition that “how” may be at least as important as “how much.” This is obvious in Austrian business-cycle theory, which posits that where new money is injected affects the ultimate impact of the injection. Garrison uses this same notion to advance our understanding of fiscal policy. He sees the variety of ways in which a deficit can be financed (borrowing domestically, borrowing abroad, and monetizing debt) as the potential source of much of its economic damage, in that it creates uncertainty, which dissuades many entrepreneurs from lengthening the structure of production, thus hampering economic growth. Another implication of this is that each method is used only as long as it meets little political resistance. Once experience reveals the true costs of the method, policymakers switch to another. Garrison uses this fact to explain a good deal of U.S. fiscal history in the ’80s and ’90s.

The book’s target audience is professional economists, but with only a few dozen graphs, a handful of equations and a clear style, it is more accessible to the educated layman than most of what’s being written about economics nowadays. Still, it will be the reaction of professional economists that will make or break this book. Time and Money has the potential not merely to improve the way economists look at macroeconomics, but to take it to the next level. It sends out a message of utmost importance: that economists cannot adequately understand macroeconomic phenomena if they neglect the role of capital.

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