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

378 Money, Bank Credit, and Economic Cyclesobvious that saving is inadequate to permit the completion ofthe more capital-intensive investments made by mistake. Thesituation would resemble that of the imaginary inhabitants ofan island who, having undertaken the construction of an enormousmachine capable of completely satisfying their needs,had exhausted all of their savings and capital before finishingit and had been left with no other choice but to temporarilyabandon the project and return all of their energy to the dailysearch for food at a mere subsistence level, i.e., without theassistance of any capital equipment. 88 In our society such ashortage of savings leads to the following: many factories areclosed, particularly in the stages furthest from consumption,numerous investment projects launched in error are paralyzed,and many workers are laid off. Furthermore pessimismspreads throughout society, and the notion that an inexplicableeconomic crisis has erupted, shortly after people had begun tobelieve that the boom and optimism, far from reaching theirpeak, would last indefinitely, demoralizes even the most persistentlyhigh-spirited. 8988 See Huerta de Soto, “La teoría austriaca del ciclo económico,” inEstudios de Economía Politica, chap. 13, p. 175. In Hayek’s own words:The situation would be similar to that of a people of an isolatedisland, if, after having partially constructed an enormousmachine which was to provide them with all necessities, theyfound out that they had exhausted all their savings and availablefree capital before the new machine could turn out itsproduct. They would then have no choice but to abandon temporarilythe work on the new process and to devote all theirlabour to producing their daily food without any capital.(Hayek, Prices and Production, p. 94)89 The entrepreneurs must restrict their activities because theylack the funds for their continuation on the exaggerated scale.Prices drop suddenly because these distressed firms try toobtain cash by throwing inventories on the market dirt cheap.Factories are closed, the continuation of construction projectsin progress is halted, workers are discharged. As on the onehand many firms badly need money in order to avoid bankruptcy,and on the other hand no firm any longer enjoys confidence,the entrepreneurial component in the gross marketrate of interest jumps to an excessive height. (Mises, HumanAction, p. 562)