As excess supplies of money work their way through the market, they cause differential effects on prices. Some go up by a lot, some only by a little. These price effects divorce prices from the underlying preferences of producers and consumers and in so doing undermine all three informational roles of prices discussed above. When the informational role of prices is damaged, economic coordination is more difficult and economic growth suffers as a result. The real effects of a macroeconomic disturbance like inflation are the ways in which it undermines the microeconomic coordination process by disrupting price signals. If the analyst begins by assuming this coordination has already occurred, as do equilibrium models, then these effects of macroeconomic disturbances will be overlooked.
I agree with the Austrian view that many important economic phenomena, particularly entrepreneurship and economic dynamics, can best be understood outside of the general equilibrium framework. I strongly suspect that a slump in output and employment is one such phenomenon. That is, it is the dynamic process of adjustment that needs to be understood, not some equilibrium rest point. General equilibrium means, nearly by definition, a situation of full employment and maximum potential output.
As an aside, I would add that the process of adjustment seems to be even more difficult when there is general deflation than when there is general inflation.
Where I part with the Austrians is in their tendency to view monetary policy errors as if they were the only source of disequilibrium large enough to cause a major reduction in employment and output. Here, my views are Keynesian, with a subtle difference.
Keynes believed that saving was determined by a hoarding propensity and that investment was determined by "animal spirits." When investment demand falls short of the desire for saving, a slump results.
I also believe that capital market psychology plays a role in macroeconomic fluctuations. However, I see the main feature as the market risk premium. When financial intermediaries are trusted, the risk premium falls. However, this can lead to a bubble, which may suddenly pop. At that point, the market sends very different signals about where opportunities lie.
For example, over the past year the shocks to financial markets in the United States have sent signals to entrepreneurs and workers to leave the housing construction industry and instead to get into, say, export industries or import-competing industries. This is easier said than done, so in the meantime unemployment rises and output falls short of potential.
I believe that shocks to the financial system often are market-generated. In contrast, an Austrian would insist that the Fed is responsible for all bad things, such as the subprime mortgage market boom and bust.
Attributing every financial distortion to Fed behavior can be almost tautological if one is not careful. Here, the Austrian bias against empiricism gives me trouble. I would like the hypothesis that all economy-wide shocks are caused by the Fed to be falsifiable.
To the extent that Austrians make predictions that sound falsifiable, they tend to be like Paul Krugman (who is not an Austrian), repeating a mantra "bad times are coming, bad times are coming" every year. Then, when bad times come they can say, "See, I told you so." It would be more interesting if every once in a while they predicted good times.