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

280 Money, Bank Credit, and Economic Cyclescapital equipment is not only physical, but technological andeconomic as well (obsolescence). Hence capital goods must bepreserved and maintained (in Robinson Crusoe’s case, hemust take care of his stick and protect it from wear). Thismeans entrepreneurs must repair existing capital goods; and,even more importantly, they must constantly produce newcapital goods to replace the old ones they are in the process ofconsuming. Depreciation refers to the wear capital goodsundergo during the production process. A certain minimumlevel of saving is essential in order to compensate for depreciationby producing the capital goods necessary to replace onesthat have worn out or depreciated. This is the only way for theactor to maintain his productive capacity intact. Moreover ifhe wishes to further increase the number of stages, lengthenthe processes and make them more productive, he will have toaccumulate even more than the minimum savings required to counteractthe strict amortization rate, the accounting term for thedepreciation of capital goods. To save, the actor must reduceconsumption in relation to production. If his output is constant,he must curtail his actual consumption; however if hisoutput is growing, he will be able to save (to accumulate capitalgoods) by keeping his volume of consumption relativelyconstant. Nevertheless even in this last case saving requires thesacrifice (as always) of the increasing volumes of potential consumptionwhich a growing output would permit.In every production process (i.e., series of successivestages or capital goods) it is possible to distinguish the stageswhich are relatively closer in time to the final consumer goodfrom those which are relatively further from it. As a generalrule capital goods are difficult to convert, and the closer theyare to the final stage of consumption, the more difficult istheir convertibility. Nonetheless the fact that capital goodsare difficult to adapt does not mean the actor, in his actionprocess, is not often forced to modify the objectives of hisaction, and consequently, to review and convert the stages hehas already completed (i.e., to convert his capital goods as faras is practicable). In any case, when circumstances change orthe actor changes his mind and modifies the aim of his action,the capital goods he has produced up to that point may