Microfoundations and macroeconomics: 20 years


This paper summarizes Horwitz’s contributions in Microfoundations and Macroeconomics: An Austrian Perspective and evaluates its connection with recent contributions in Austrian macroeconomics. The paper emphasizes the connection between relative price, monetary equilibrium, and monetary policy. The paper pays particular attention to the implications of Horwitz’s denomination of capital theory as a “missing link” in economic theory.

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  1. 1.

    The socialist calculation debate has been extensively discussed. For an overview of this topic see Cachanosky and Padilla (2017); Caldwell (1997); Coyne et al. (2005); Lavoie (1981) Hayek (1948, Chapters VII, VIII, IX).

  2. 2.

    This is the idea behind Lucas’ (1972, 1973, 1975) island model.

  3. 3.

    For illustrtion purposes, this is one of the arguments of why the 2008 crisis took place. By targeting price level stability, major central banks went off-track and carried out an interest rate policy that was too low for too long (Taylor 2009). The problem is that price level stability is equivalent to monetary equilibrium only under special conditions (see below). Due to the instituional arrangement in place and to financial market regulations, the monetary disequilibrum took the form of a housing bubble. See Cachanosky (2018, Chapter 6); Selgin et al. (2015); Taylor (2009), White (2008).

  4. 4.

    There is no room to get into the nuances and debates surrounding a free banking regime. For an overview of this literature see Cachanosky (2018, Chapter 1); Dowd (1992); Murphy (2013); Selgin (1988, 1996); Smith (1936); and White (1984, 2014).

  5. 5.

    Of course there are more complex models that include heterogeneous economic agents. Yet, this is not the core approach in the development of macroeconomic theory. Heterogeneous agents are an addition to simpler models with representative agents rather than being the other way around.

  6. 6.

    Hayek was far from bieng the only economist at the time of endorsing this principle of monetary equilibrium. See Selgin (1996, Chapter 8).

  7. 7.

    Certainly the Austrians are not the only ones looking at nominal income targeting as a feasible target for monetary policy. For a sample see McCallum (2011); Garín et al. (2016); and Hall and Mankiw (1994).

  8. 8.

    Following this discussion, a “neutral” monetary policy (in Hayek’s terms) is not the one that would keep relative prices unaffected, but the one that would target monetary equilibrium.

  9. 9.

    Probably the two more important contemporary works on capital theory are Kirzner (1996) and Lewin (1999).

  10. 10.

    There are, actually, two durations, Macualay duration and modified duration. We discuss their meaning and relationship in our work.

  11. 11.

    For our most relevant work in this area see Cachanosky (2015) and Cachanosky and Lewin (2014, 2016a, b).

  12. 12.

    In terms of the meaning and valaution of capital see Lewin and Cachanosky (2018b) and Braun et al. (2016).

  13. 13.

    For a review of Austrian friendly reactions after the 2008 crisis see Cachanosky and Salter (2017).


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Correspondence to Nicolás Cachanosky.

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Cachanosky, N. Microfoundations and macroeconomics: 20 years. Rev Austrian Econ 34, 279–288 (2021). https://doi.org/10.1007/s11138-020-00500-1

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  • Microfoundations
  • Capital theory
  • Monetary equilibrium

JEL codes

  • B53
  • E14
  • E30
  • E50