Chapter Ǻ: Macroeconomics and Coordination ȀȂȀbecause each is founded, one way or another, on the conventional but
empirically fallacious assumption that the coordination of economic
activities is costless.
As this remark suggests, the key question of money/macro theory is
not “What determines whether aggregate demand for goods and services
is deficient or excessive or just right?” but “What determines whether the
processes of exchange and coordination in an economy of decentralized
decisionmaking are working smoothly?”
Austrian economists recognize the disaggregated character of eco-
nomic activity. Ļey take seriously the profound differences between an
advanced economy of fine-grained division of labor and the nearly self-
sufficient miniature economy of a medieval monastery or manor or of
Swiss family Robinson on its desert island (cf. EuckenȀȈȄǿ). Knowl-
edge of wants, resources, technology, and market opportunities, including
knowledge of temporary and local conditions, is radically decentralized
and simply could not be made available to central planners in anything
approaching its fullness. If knowledge is not to go to waste, produc-
tion and consumption decisions must be radically decentralized (Hayek
ȀȈȃȄ/ȀȈȃȈ). Specialization greatly enhances productivity. People produce
their own particular goods and services to exchange them away, thereby
exercising demand for what other specialists are producing. But what coor-
dinates all these fragmented activities?
Ļe debates over economic calculation under socialism and capital-
ism initiated by Ludwig von Mises and Friedrich Hayek illuminate the
scope of this question (cf. the literature reviewed in YeagerȀȈȈȃ). Even
the mere physical meshing of activities as portrayed in a self-consistent
input-output table is hard enough to achieve in the absence of genuine
markets and prices, as Soviet experience testifies. Full coordination is a
still more demanding task. It requires taking account of physical and sub-
jective substitutabilities and complementarities among goods and services
and factors of production in their various uses in consumption and produc-
tion so that no unit of a productive resource goes to satisfy a less intense
effective final demand to the denial of a more intense demand. Market
bids and offers for resources and final goods play a central role in this
process, but its very complexity permits glitches.
Forces of unbalanced supply and demand tend, to be sure, to press
disequilibrium prices toward their market-clearing levels. What ensures,
however, that these coordinating forces operate rapidly enough and that
impediments to transactions do not reinforce each other in the meanwhile