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

Additional Considerations on the Theory of the Business Cycle 403Hayek revealed that the increasing speed at whichthe rise in the monetary income of the factors of productionpushes up the demand for consumer goodsand services ultimately limits the chances that theinevitable eruption of the crisis can be deferred via thesubsequent acceleration of credit expansion. Indeedsooner or later a point will be reached at whichgrowth in the prices of consumer goods will actuallystart to outstrip the increase in the monetary incomeof the original factors, even though this may only bedue to the emergence of a slowdown in the arrival ofconsumer goods and services to the market, as aresult of the “bottlenecks” caused by the attempt tomake society’s productive structure more capitalintensive.Beginning at that point, the income generatedby the factors of production, specifically wages,will begin to decline in relative terms, and thereforeentrepreneurs will find it advantageous to substitutelabor (now relatively cheaper) for machinery, and the“Ricardo Effect” will enter into action, hindering theprojects of investment in capital-intensive goods, andthus ensuring the outbreak of the recession. 66 Hayek draws the following analogy to explain this phenomenon:The question is rather similar to that whether, by pouring aliquid fast enough into one side of a vessel, we can raise thelevel at that side above that of the rest to any extent we desire.How far we shall be able to raise the level of one part abovethat of the rest will clearly depend on how fluid or viscid theliquid is; we shall be able to raise it more if the liquid is syrupor glue than if it is water. But in no case shall we be at libertyto raise the surface in one part of the vessel above the rest toany extent we like. Just as the viscosity of the liquid determinesthe extent to which any part of its surface can be raisedabove the rest, so the speed at which an increase of incomesleads to an increase in the demand for consumers’ goods limitsthe extent to which, by spending more money on the factorsof production, we can raise their prices relative to thoseof the products. (Hayek, “The Ricardo Effect,” pp. 127–52;Individualism and Economic Order, p. 241)