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

Additional Considerations on the Theory of the Business Cycle 4176CREDIT EXPANSION AS THE CAUSEOF MASSIVE UNEMPLOYMENTThe direct cause of massive unemployment is labor marketinflexibility. In fact state intervention in the labor market andunion coercion, made possible by the privileges the legal systemconfers on unions, result in a series of regulations (minimumwages, entry barriers to maintain wages artificially high,very strict, interventionist rules on hiring and dismissal, etc.)which make the labor market one of the most rigid. Furthermoredue to the artificial costs labor legislation generates, thediscounted value of a worker’s real marginal productivitytends to fall short of the total labor costs the entrepreneurincurs (in the form of monetary costs, such as wages, andother costs, such as subjective inconveniences) in hiring theworker. This leads to markedly high unemployment, whichwill affect all workers whose expected marginal productivityyields a discounted value lower than the cost involved inemploying them. Therefore they will either be dismissed ornot hired at all.Whereas the direct cause of unemployment is clearly thatindicated above, the indirect cause is still inflation; morespecifically, credit expansion initiated by the banking systemwithout the backing of real saving. Credit expansion is ultimatelywhat gives rise to massive unemployment, since itinstigates the entire process of widespread discoordinationand malinvestment described. It does so by extensively allocatingoriginal means of production to parts of the productivestructure where they do not belong, considering that entrepreneursattract them to lengthen and widen the capital goodsstructure, without realizing that in doing so they commit aresources and scarce capital. Some resources have been completelywasted, and even those malinvestments that continuein use will satisfy consumers less than would have been thecase without the credit expansion. (Rothbard, Man, Economy,and State, p. 863)