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

Bank Credit Expansion and Its Effects on the Economic System 343individuals is positive in the sense that it allows them to augmenttheir income, socially speaking, when the aggregatedemand for consumer goods diminishes, the decrease eventuallyexerts a negative effect on investment and production. 58In contrast we have presented the theoretical argumentsCapital (1976 ed.), p. 439. In short it means understanding that it is perfectlyfeasible for an entrepreneur of consumer goods to earn moneyeven when his sales do not increase and even decrease, if the entrepreneurreduces his costs by substituting capital equipment for labor. (Theincreased investment in capital equipment creates jobs in other stagesand makes society’s productive structure more capital-intensive.) Seealso J. Huerta de Soto, “Hayek’s Best Test of a Good Economist,” Procesosde Mercado 5, no. 2 (Autumn 2004): 121–24.58 To F.A. Hayek goes the credit for being the first to have theoreticallydemolished the supposed “paradox of thrift” in 1929, in his article, “Gibtes einen ‘Widersinn des Sparens’?” (“The ‘Paradox’ of Saving,” Economica2, no. 2 [May 1931], and reprinted in Profits, Interest and Investment, pp.199–263). In Italy Augusto Graziani defended a position very similar toHayek’s in his article, “Sofismi sul risparmio,” originally published inRivista Bancaria (December 1932), and later reprinted in his book, Studi diCritica Economica (Milan: Società Anonima Editrice Dante Alighieri, 1935),pp. 253–63. It is interesting to note that an author as distinguished asSamuelson has continued to defend the old myths of the theory of underconsumptionwhich constitute the basis for the paradox of thrift. He doesso in various editions of his popular textbook, and as one might expect,relies on the fallacies of Keynesian theory, which we will comment on inchapter 7. It is not until the thirteenth edition that the doctrine of the“paradox of thrift” becomes optional material and the corresponding diagramjustifying it disappears (Paul A. Samuelson and William N. Nordhaus,Economics, 13th ed. [New York: McGraw-Hill, 1989], pp. 183–85).Later, in the 14th edition (New York: McGraw-Hill, 1992), all references tothe topic are silently and prudently eliminated. Unfortunately, however,they reappear in the 15th edition (New York: McGraw-Hill, 1995, pp.455–57). See also Mark Skousen “The Perseverance of Paul Samuelson’sEconomics,” Journal of Economic Perspectives 2, no. 2 (Spring, 1997): 137–52.The main error in the theory of the paradox of thrift consists of the factthat it ignores the basic principles of capital theory and does not treat theproductive structure as a series of consecutive stages. Instead it containsthe implicit assumption that only two stages exist, one of final aggregateconsumer demand and another made up of a single set of intermediateinvestment stages. Thus in the simplified model of the “circular flow ofincome,” it is assumed that the negative effect on consumption of anupsurge in saving immediately and automatically spreads to all investment.On this topic see Skousen, The Structure of Production, pp. 244–59.