The Austrian explanation of the monetary theory of the trade cycle has been the subject of debate this past week on some of the elite economic blogs. It started with Martin Wolf at the Financial Times, then Paul Krugman picked up the theme at the New York Times here and here, and then Tyler Cowen discusses the topic at Marginal Revolution.
Both Krugman and Cowen agree that the Austrian story of the boom and the bust relies at a critical point on Keynesian ideas. But is this interparadigmatic dialogue capturing the essential points about malinvestment, unemployment, and self-correction in a market economy?
In another post Daniel Kuehn calls for a Keynesian-Austrian synthesis.
To me the issue is that what Austrians and Keynesians share is neither methodology nor analytic, but instead the recognition of the complex problem situation within which individuals find themselves in making their economic decisions. The "dark forces of time and ignorance" ensnare us, but the guiding role of relative prices and the discipline of profit and loss (and other institutions that undergird the market economy) work to coordinate economic plans and realize the mutual gains of trade and social cooperation under the division of labor. Coordination problems result when the price signals of the market get distorted and the discipline of profit and loss get softened by government actions. As Roger Garrison has situated the Austrian theory, when money is viewed as a tight joint (as in the New Classical theory) there are no macroeconomic problems, and when money is viewed as a broken joint (as in the Keynesian theory) there is no market solution to the problems of business cycles. But in the Austrian theory, money is viewed as a loose joint, and thus disturbances in a nominal variable can have real effects.
If you combine the non-neutrality of money with the point about the capital structure consisting of heterogenous capital goods that have multiple specific uses, then you get the Austrian malcoordination story and its serious consequences for the economic system.