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

326 Money, Bank Credit, and Economic Cyclesbrought about by an increase in saving, causes the presentvalue of a capital good with a very long life to more than double(the present value of a perpetual unitary rent at 11 percentinterest is equal to 1/0.11 = 9.09; and the present value of aperpetual rent at 5 percent interest is equal to 1/0.05 = 20). Ifthe capital good lasts, for example, twenty years, a drop inthe interest rate from 11 to 5 percent produces an increase of56 percent in the market or capitalized value of the good. 46Therefore if people begin to value present goods less inrelative terms, then the market price of capital goods anddurable consumer goods will tend to increase. Moreover itwill tend to increase in proportion to the duration of a good;i.e., to the number of productive stages in which it is used andto the distance of these stages from consumption. Capitalgoods already in use will undergo a significant rise in price asa result of the drop in the interest rate and will be produced ingreater quantities, bringing about a horizontal widening of thecapital goods structure (that is, an increase in the production ofpre-existing capital goods). At the same time, the fall in theinterest rate will reveal that many production processes orcapital goods which until then were not considered profitablebegin to be so, and consequently entrepreneurs will start tointroduce them. In fact in the past entrepreneurs refrainedfrom adopting many technological innovations and new projectsbecause they expected the cost involved to be higher thanthe resulting market value (which tends to equal the value ofthe estimated future rent of each capital good, discounted bythe interest rate). However when the interest rate falls, the46 The formula is a n = 1 – (1 + i)-n =i(1 + i) n – 1 ,i(1 + i) nwhich in terms of compound capitalization at interest i, corresponds tothe present value of a temporary annuity, payable in arrears, of n periods,where the capitalization period coincides with the rent period. It isclear that as period n becomes longer and approaches infinity, the value ofthe rent will approach 1/i, which as a mnemonic rule, is applicable in practiceto all capital goods with a very long life (and to land, due to its permanence).See Lorenzo Gil Peláez, Tablas financieras, estadísticas y actuariales,6th revised updated ed. (Madrid: Editorial Dossat, 1977), pp. 205–37.