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

414 Money, Bank Credit, and Economic Cyclesfactors of production have been transformed into capitalgoods, these goods become non-convertible to a certain extent.In other words, many capital goods will lose all of their valueonce it becomes clear there is no demand for them, they weremanufactured in error and they should never have been produced.It will be possible to continue using others, but onlyafter spending a large amount of money redesigning them.The production of yet others may reach completion, but giventhat the capital goods structure requires that the goods be complementary,they may never be operated if the necessary complementaryresources are not produced. Finally, it is conceivablethat certain capital goods may be remodeled at arelatively low cost, though such goods are undoubtedly in theminority. 14 Hence a widespread malinvestment of society’sscarce productive resources takes place, and a loss of many ofits scarce capital goods follows. This loss derives from the distortedinformation which, during a certain period of time,entrepreneurs received in the form of easier credit terms andrelatively lower interest rates. 15 Many investment processes14 As a general rule, the closer a capital good is to the final consumergood, the more difficult it will be to convert. In fact all human actionsare more irreversible the closer they are to their final objective: a housebuilt in error is an almost irreversible loss, while it is somewhat easierto modify the use of the bricks if it becomes obvious during the courseof the construction that using them to build a specific house is a mistake(see comments on pp. 280–82 previously).15 Thus the theory of the cycle is simply the application, to the specificcase of credit expansion’s impact on the productive structure, of the theoryon the discoordinating effects of institutional coercion, a theory wepresent in Socialismo, cálculo económico y función empresarial (esp. pp.111–18). Lachmann arrives at the same conclusion when he states thatmalinvestment is “the waste of capital resources in plans prompted bymisleading information,” adding that, though many capital goods reachcompletion, theywill lack complementary factors in the rest of the economy.Such lack of complementary factors may well express itself inlack of demand for its services, for instance where these factorswould occupy “the later stages of production.” To theuntrained observer it is therefore often indistinguishablefrom “lack of effective demand.” (Lachmann, Capital and itsStructure, pp. 66 and 117–18)