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

Bank Credit Expansion and Its Effects on the Economic System 339In short, in our example there has been no drop in themoney supply (and therefore no external deflation, strictlyspeaking),nor has the demand for money risen. So if weassume both of these factors remain constant, then the generalfall in the price of consumer goods and services arises exclusivelyfrom the upsurge in saving and the increase in productivity,itself a consequence of the more capital-intensive productivestructure. Moreover this brings about marked growthin wages (in real terms), which, though their nominal valuethe price index are both distorted because they focus mainly on the finalstage, consumption. Therefore it is easy to see how, in the initial phasesof the process triggered when voluntary saving rises, a statisticaldecrease in economic growth is registered. In fact there is often an initialdecline in final consumer and investment goods, while nationalaccounting statistics fail to reflect the parallel increase in investment inthe stages furthest from consumption, the creation of new stages, not tomention the growth in investment in non-final intermediate products,stocks and inventories of circulating capital. Moreover the consumerprice index falls, since it merely reflects the effect the reduced monetarydemand has on consumer goods stages, yet no index adequately recordsthe growth in prices in the stages furthest from consumption. Consequentlydifferent agents (politicians, journalists, union leaders, andemployers’ representatives) often make an erroneous popular interpretationof these economic events, based on these statistical nationalaccounting measures. Hayek, toward the end of his article on “TheRicardo Effect” (Individualism and Economic Order, pp. 251–54), offers adetailed description of the great statistical difficulties which exist withrespect to using national accounting methods to record the effects on theproductive structure of an increase in voluntary saving; or in this case,the influence of the “Ricardo Effect.” More recently, in his Nobel Prizeacceptance speech, F.A. Hayek warned against the particularly widespreadcustom of regarding unsound theories as valid simply becausethere appears to be empirical support for them. Hayek cautionedagainst rejecting or even ignoring true theoretical explanations merelybecause it is quite difficult, from a technical standpoint, to collect thestatistical information necessary to confirm them. These are preciselythe errors committed in the application of national income accountingto the process by which the productive stages furthest from consumptiongrow wider and deeper, a process always due to a rise in voluntarysaving. See “The Pretence of Knowledge,” Nobel Memorial Lecture,delivered December 11, 1974 and reprinted in The American EconomicReview (December 1989): 3–7.