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

318 Money, Bank Credit, and Economic CyclesFor analytical purposes we will begin by considering anextreme situation which nevertheless will be of great assistancein graphically illustrating and better understanding theprocesses involved. We will suppose that economic agentssuddenly decide to save 25 percent of their net income. Ourstarting point will be the clear, numerical example of the lastsection, in which we assumed net income was equal to 100m.u., which corresponded to the original means of productionand the interest capitalists received, and which was spententirely on consumer goods. We will now suppose that, as aresult of a fall in time preference, economic agents decide torelinquish 25 percent (i.e., one-fourth) of their consumptionand to save the corresponding resources, offering this excessof present goods to potential demanders of them. Three effectssimultaneously follow from this increase in voluntary saving.Given their great importance, we will now consider them separately.44of thrift,” this concept follows when Keynes’s economic principles arecarried to their “logical” conclusion:If governments should increase their spending during recessions,why should not households? If there were no principlesof “sound finance” for public finance, from where wouldsuch principles come for family finance? Eat, drink and bemerry, for in the long-run all are dead. (Clifford F. Thies, “TheParadox of Thrift: RIP,” Cato Journal 16, no. 1 [Spring–Summer,1996]: 125)See also our comments in footnote 58 on the treatment this subjectreceives in different editions of Samuelson’s textbook.44 Following Turgot, Eugen von Böhm-Bawerk was the first to confrontand resolve this issue. His analysis was rudimentary, yet contained allthe essential elements of a definitive explanation. It is found in volume2 of his magnum opus, Capital and Interest, published in 1889 (Kapital undKapitalzins: Positive Theorie des Kapitales, pp. 124–25). Due to its significance,we include here the passage from Capital and Interest in whichBöhm-Bawerk poses the question of growth in voluntary saving in amarket economy and the forces involved which lead to a lengthening ofthe productive structure: let us suppose, says Böhm-Bawerk, thateach individual consumes, on the average, only three-quartersof his income and saves the other quarter, then obviouslythere will be a falling off in the desire to buy consumptiongoods and in the demand for them. Only three-quarters as