Ȁȃȇ Partʺ: EconomicsWith none of responsesȀ,ȁ, andȂoperating, the market process of
reequilibrating money’s supply and demand has to be the roundabout pro-
cess of adjusting innumerable prices and wages on the individual markets
for goods and services. For reasons already noted, prices and wages cannot
immediately jump to their new equilibrium level and pattern. Meanwhile,
transactions, production, and employment suffer.
Ļe supposed problem of oversaving boils down, then, to monetary dis-
equilibrium. Unsurprisingly, what looks like oversaving—a general defi-
ciency of demand posing an economywide impediment to transactions—is
connected with the medium of exchange, which is also, in our current sys-
tem, the medium in which prices are correctly or incorrectly set or adjusted
or left unadjusted.
Suitable monetary institutions and policy might avoid macro disco-
ordination involving saving and investment and a general deficiency or
excess of demand for current output. By themselves, however, they can-
not ensure both that a proper share of current income is saved and devoted
to capital formation and that resources are properly allocated among cap-
ital-construction projects by economic sectors and by degrees of remote-
ness from final consumption. Nothing can ensure such ideal results—and
the very meaning of “proper” in this context is unclear. People do not
have perfect foresight, so some capital-construction projects are bound
to turn out, in retrospect, to have been unwise, while others will turn
out to have been worth expanding. Furthermore, nothing guarantees that
the proper share of income will be saved and invested or, in other words,
that “society” will discount the future at the proper rate. (Ļese are inher-
ently fuzzy concepts anyway; and again, it is pointless to blame reality for
being real.)
Still, avoiding monetary disruption means avoiding a major obstacle to
the functioning of the price system. Undistorted by monetary influences,
the interest rate is free to play its coordinating role, along with other prices.
A well functioning price system allows people to use their own decen-
tralized knowledge and judgments in allocating their resources between
current consumption and investment to achieve greater future consump-
tion. Monolithic central decisions that might turn out monstrously wrong
are avoided. Entrepreneurs whose judgments turn out consistently sound
will acquire greater control over resource allocation than those whose
judgments turn out consistently mistaken. Even if the inherited array of
capital goods does prove at any time to be what hindsight deems a mis-
take—as inevitably it will to some extent—market signals and incentives