1. Introduction

Though most textbooks on economics and the history of economic thought contain the assertion that the subjectivist revolution Carl Menger started in 1871 has been fully absorbed by modern economic theory, to a large extent this claim is mere rhetoric. The old “objectivism” of the Classical School which dominated economics until the eruption of the marginalist revolution continues to wield a powerful influence. Moreover various important fields within economic theory have until now remained largely unproductive due to the imperfect reception and assimilation of the “subjectivist view.”¹

Perhaps money and “macroeconomics” (a term of varying accuracy) constitute one of the most significant areas of economics in which the influence of the marginalist revolution and subjectivism has not yet been noticeable. In fact with the exception of Austrian School theorists, in the past macroeconomic scholars have not generally been able to trace their theories and arguments back to their true origin: the action of human individuals. More specifically, they have not incorporated the following essential idea of Menger's into their models: every action involves a series of consecutive stages which the actor must complete (and which take time) before he reaches his goal in the future. Menger's most important conceptual contribution to economics was his theory of economic goods of different order (consumer goods, or “first-order” economic goods, and “higher-order” economic goods). According to this theory, higher-order economic goods are embodied in a number of successive stages, each of which is further from final consumption than the last, ending in the initial stage in which the actor plans his whole action process. The entire theory of capital and cycles we have presented here rests on this concept of Menger's. It is a basic idea which is easy to understand, given that all people, simply by virtue of being human, recognize this concept of human action as the one they put into practice daily in all contexts in which they act. In short Austrian School theorists have developed the whole theory of capital, money and cycles which is implicit in the subjectivism that revolutionized economics in 1871.

Nevertheless in economics antiquated patterns of thinking have been at the root of a very powerful backlash against subjectivism, and this reaction is still noticeable today. Thus it is not surprising that Frank H. Knight, one of the most important authors of one of the two “objectivist” schools we will critically examine in this chapter, has stated:

Perhaps the most serious defect in Menger's economic system... is his view of production as a process of converting goods of higher order to goods of lower order.²

We will now consider the ways in which the ideas of the Classical School have continued to predominate in the Monetarist and Keynesian Schools, the developers of which have thus far disregarded the subjectivist revolution started in 1871. Our analysis will begin with an explanation of the errors in the concept of capital proposed by J.B. Clark and F.H. Knight. Then we will critically examine the mechanistic version of the quantity theory of money supported by monetarists. Following a brief digression into the school of rational expectations, we will study the ways in which Keynesian economics, today in the grip of a crisis, shares many of the theoretical errors of monetarist macroeconomics.³