Austrians and Friedman on Rates: Working paper
Two Natural Rates: Friedman and the Austrians
by Larry Sechrest (Sul Ross University)
The key controversy that lies at the heart of macroeconomics is, and long has been, the question of what causes business cycles. Many different explanations have been offered for the cyclical movements in prices, production, employment, and so forth. These explanations have included, among others, phenomena as diverse as irrational exuberance, technological innovations, perverse central bank policies, chaotic changes in business investment, and the misidentification of changes in the price level as representing changes in relative prices. What most cycle theories have consistently and, it seems, almost obstinately ignored is the crucial role of the capital structure. It is the structure of capital which serves as the conduit through which monetary effects are transformed into real effects, that is, through which the short run merges into the “medium run�, and the medium run into the long run. In abstract terms, the capital structure embodies the relationship between monetary theory and value theory.
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