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

440 Money, Bank Credit, and Economic Cyclesemployed through this procedure dedicate most oftheir income to consumption, the price of consumergoods tends to rise in relative terms, causing the delicatesituation of companies from the stages furthestfrom consumption to deteriorate even further. In anycase, in their contracyclical policies of public spending,it is nearly impossible for governments to resistthe influence of all kinds of political pressures whichtend to render these policies even more inefficient andharmful, as indicated by the conclusions of publicchoicetheory. Furthermore there is no guarantee thatby the time governments diagnose the situation anddecide to take the supposedly remedial measures,they will not err with respect to the timing orsequence of the different phenomena and tend withtheir measures to worsen rather than solve the maladjustments.38 11THE THEORY OF THE CYCLE AND IDLE RESOURCES:THEIR ROLEINTHEINITIAL STAGESOFTHEBOOMCritics of the Austrian theory of the business cycle oftenargue that the theory is based on the assumption of the fullemployment of resources, and that therefore the existence of idleresources means credit expansion would not necessarily giverise to their widespread malinvestment. However this criticismis completely unfounded. As Ludwig M. Lachmann hasinsightfully revealed, the Austrian theory of the business cycledoes not start from the assumption of full employment. Onthe contrary, almost from the time Mises began formulatingthe theory of the cycle, in 1928, he started from the premisethat at any time a very significant volume of resources could38 On this topic see Ludwig von Mises, “The Chimera of ContracyclicalPolicies,” pp. 798–800 of Human Action. See also the pertinent observationsof Mark Skousen on “The Hidden Drawbacks of Public Works Projects,”pp. 337–39 of his book, The Structure of Production.