Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Bank Credit Expansion and Its Effects on the Economic System 273Hence capital goods are “higher-order economic goods,”or factors of production which subjectively materialize at eachintermediate stage in a particular action process. Moreovercapital goods arise from the union of three essential elements:natural resources, labor and time, all of which are combined inentrepreneurial action conceived and processed by humanbeings. 11The sine qua non for producing capital goods is saving, orthe relinquishment or postponement of immediate consumption.Indeed in an action process the actor will only be able toof the problems generally attempted to be elucidated by capitaltheory.Israel M. Kirzner, An Essay on Capital (New York: Augustus M. Kelley,1966), p. 38; reproduced in Israel M. Kirzner’s book, Essays on Capital andInterest: An Austrian Perspective (Aldershot, U.K.: Edward Elgar, 1996),pp. 13–122.11 This explains the traditional notion of three factors of production: landor natural resources, labor, and capital goods or higher-order economicgoods. In each process of action or production, the actor, using his entrepreneurialsense, generates and combines these factors or resources. Theprocesses culminate in the market in four different types of income:pure entrepreneurial profit, stemming from the actor’s alertness andcreativity; rent from land or natural resources, in terms of their productivecapacity; labor income or wages; and rent derived from the use ofcapital goods. Even though all capital goods ultimately consist of combinationsof natural resources and labor, they also incorporate (apartfrom the entrepreneurial alertness and creativity necessary to conceiveand generate them), the time required to produce them. Furthermorefrom an economic standpoint capital goods cannot be differentiatedfrom natural resources solely in terms of their distinct physical form.Only purely economic criteria, such as the unaltered permanence of agood with respect to the achievement of goals and the fact that no furtheraction is required of the actor, enable us from an economic standpointto clearly distinguish between land (or a natural resource), whichis always permanent, and capital goods, which strictly speaking, are notpermanent and are spent or “consumed” during the production process,making it necessary to take their depreciation into account. This is whyHayek has affirmed that, despite appearances, “Permanent improvementsin land is land.” F.A. Hayek, The Pure Theory of Capital (London:Routledge and Kegan Paul, [1941] 1976), p. 57; reedited by Lawrence H.White, as vol. XII of The Collected Works of F.A. Hayek (Chicago: Universityof Chicago Press, 2007). See also p. 298 and footnote 31.