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

408 Money, Bank Credit, and Economic CyclesAt any rate credit expansion always gives rise to the samewidespread malinvestment in the productive structure,whether by artificially lengthening the existing structure(when expansion directly affects the capital goods stages,financing durable consumer goods) or shortening it (whencredit expansion directly finances non-durable consumergoods). 9means of the credit expansion obviously implies that there isso much less pressure on the credit market, and that someproducers’ goods industry, which would not otherwise haveobtained credit to finance an expansion, will be enabled to doso by this means. . . . Or the consumers’ goods industrieswould not have had any incentive to extend production in theabsence of the credit expansion; in this case the fact that theynow enter the market for producers’ goods with relativelyincreased buying power as against all other industries . . .may lead to a change in the distribution of productive factorsinvolving a shift from the stages far from consumption to thestages near to consumption. (Machlup, The Stock Market,Credit and Capital Formation, pp. 192–93)In Prices and Production (pp. 60–62 of the 1935 edition) Hayek uses histriangular diagrams to explain how the productive structure willinevitably become flatter and less capital-intensive, and therefore, lessproductive and poorer, if consumption is directly promoted through thegranting of loans to finance non-durable consumer goods and services.9 In the 1970s this phenomenon, along with the need to provide a simplifiedexplanation of the process of malinvestment without relying onthe complicated reasoning inherent in capital theory, led F.A. Hayek toslightly modify the popular presentation of his theory of the cycle. In hisarticle, “Inflation, the Misdirection of Labor, and Unemployment,” writtenin 1975 (and included in the book, New Studies in Philosophy, Politics,Economics and the History of Ideas, pp. 197–209), he states:[T]he explanation of extensive unemployment ascribes it to adiscrepancy between the distribution of labour (and the otherfactors of production) between the different industries (andlocalities) and the distribution of demand among their products.This discrepancy is caused by a distortion of the system of relativeprices and wages. (p. 200)In the recent “biography” of Hayek, we see that in the last years of his lifehe believed modern cycles to be characterized by the very distinct forms ofmalinvestment involved, not only credit expansion in the stages furthestfrom consumption, but also artificial stimulation of consumption and, in