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

Bank Credit Expansion and Its Effects on the Economic System 333CONCLUSION: THE EMERGENCE OF A NEW, MORECAPITAL-INTENSIVE PRODUCTIVE STRUCTUREThe three effects we have just examined are provoked bythe entrepreneurial process of seeking profit, and the combinationof the three tends to result in a new, narrower and moreelongated structure of capital goods stages. Moreover the differentialbetween income and costs at each stage, i.e., theaccounting profit or interest rate, tends to even out at a lowerlevel over all stages of the new productive structure (as naturallycorresponds to a larger volume of saving and a lowersocial rate of time preference). Therefore the shape of the productivestructure comes to closely resemble that reflected inChart V-3.Chart V-3 reveals that final consumption has fallen to 75m.u. This reduction has also affected the value of the productof the second stage (the previous stage closest to consumption),which has dropped from 80 m.u. in Chart V-1 to 64.25m.u. in Chart V-3. A similar decrease occurs in the third stage(from 60 m.u. to 53.5 m.u.), though this time the reduction isproportionally smaller. However beginning in the fourth stage(and upward, each stage further from consumption than theone before it), the demand in monetary terms grows. Theincrease is gradual at first. In the fourth stage, the figures risefrom 40 m.u. to 42.75 m.u. It then becomes proportionallymuch more substantial in the fifth stage, where the value ofthe product grows from 20 m.u. to 32.25 m.u., as we saw inChart V-2. Furthermore two new stages, stages six and seven,appear in the area furthest from consumption. These stagesdid not exist before.After all necessary adjustments have been made, the rateof profit for the different stages tends to even out at a significantlylower level than that reflected in Chart V-1. This phenomenonderives from the fact that the upsurge in voluntarysaving generates a much lower market rate of interest, and therate of accounting profit for each stage (in our example,get from current production. (Hayek, The Pure Theory of Capital,p. 275. See also footnote 13 above)