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

Bank Credit Expansion and Its Effects on the Economic System 307certain structure of productive stages remains the same orchanges, becoming narrower or broader, depends solely uponwhether the entrepreneurs of each stage subjectively decide itis worthwhile to reinvest the same percentage of the monetaryincome they have received, or instead, they believe it is morebeneficial to them to modify this proportion by increasing ordecreasing it. In the words of Hayek:The money stream which the entrepreneur representing anystage of production receives at any given moment is alwayscomposed of net income which he may use for consumptionwithout disturbing the existing method of production, andof parts which he must continuously re-invest. But itdepends entirely upon him whether he re-distributes histotal money receipts in the same proportions as before. Andthe main factor influencing his decisions will be the magnitudeof the profits he hopes to derive from the production ofhis particular intermediate product. 36Therefore no natural law forces entrepreneurs to reinvesttheir income in the same proportion in which theyhave invested in capital goods in the past. Instead, this proportiondepends on the specific circumstances present at eachmoment, and in particular on the entrepreneurs’ expectationsregarding the profit they hope to obtain at each stage of theproduction process. This means that, from an analytical standpoint,it is very important to focus on the evolution of theamounts of gross income as reflected in our diagram, and toavoid concentrating exclusively on net values, as is the custom.So we see that even when net saving equals zero, a productivestructure is maintained by considerable gross savingand investment, the sum of which is several times larger than36 Hayek, Prices and Production, p. 49. This is precisely why the conceptionof capital as a homogeneous fund that reproduces by itself is meaningless.This view of capital is defended by J.B. Clark and F.H. Knightand is the theoretical basis (along with the concept of general equilibrium)for the extremely stale model of the “circular flow of income” thatappears in almost all economics textbooks, despite the fact that it is misleading,as it does not reflect the temporal structure by stages in the productionprocess, as in Chart V-1 (see also notes 39, 58 and pp. 515–16).