A Critique of Monetarist and Keynesian Theories

This lecture is devoted to a critique of alternative economic theories formulated with the aim of interpreting and understanding why economic cycles occur. These theories differ from the ones we have explored in class. There are basically two doctrines: Keynesian economic theories, which get their name from the English economist, John Maynard Keynes, who originally developed them; and monetarist theories, which, for the most part, were developed by neoclassical theorists in general and by the Chicago school in particular. From our point of view, both monetarists and Keynesians belong to the same general school, the school of macroeconomic theorists. These theorists practice economics based on aggregates, which they consider to be statistically measurable. According to Mises, both schools fall into the pre-scientific stage of economics, the stage before the subjectivist revolution, which began with Carl Menger and introduced the subjectivist viewpoint—that is, the application of the theory of marginal utility to explain the value of goods in general and of money in particular. The subjectivist revolution, which began with Menger, framed economic science in such a way that all economic laws could be traced to individual human action. Prior to the subjectivist revolution, classical economists failed dismally to explain what determined the value of things. Why? Because they conceived economic science solely in terms of classes and aggregates. They did not understand why gold was worth more than iron or bread, when bread is obviously more useful than gold, or diamonds. The problem these theorists had was that they were conceiving economics in terms of aggregates, and they were asking the wrong question.