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

Additional Considerations on the Theory of the Business Cycle 441be idle. 39 In fact Mises demonstrated from the beginning thatthe unemployment of resources was not only compatible withthe theory he had developed, but was actually one of its essentialelements. In market processes in which entrepreneursundertake plans that involve the production of heterogeneousand complementary capital goods, errors are continually committedand due to “bottlenecks,” not all productive factorsand resources are fully employed. Thus the necessity of a flexiblemarket conducive to the exercise of entrepreneurship,which tends to reveal existing maladjustments and restorecoordination in a never-ending process. Indeed the theoryexplains how bank credit expansion interrupts and complicatesthe coordinating process by which existing maladjustmentsare remedied. 4039 [T]he Austrian theory does not, as is often suggested, assume“Full Employment.” It assumes that in general, at anymoment, some factors are scarce, some abundant. It alsoassumes that, for certain reasons connected with the productionand planned use of capital goods, some of these scarcitiesbecome more pronounced during the upswing. Those whocriticize the theory on the ground mentioned merely displaytheir inability to grasp the significance of a fundamental factin the world in which we are living: the heterogeneity of allresources. Unemployment of some factors is not merely compatiblewith Austrian theory; unemployment of those factorswhose complements cannot come forward in the conditionsplanned is an essential feature of it. (Lachmann, Capital and itsStructure, pp. 113–14)40 In 1928 Mises stated:At times, even on the unhampered market, there are someunemployed workers, unsold consumers’ goods and quantitiesof unused factors of production, which would not existunder “static equilibrium.” With the revival of business andproductive activity, these reserves are in demand right away.However, once they are gone, the increase of the supply offiduciary media necessarily leads to disturbances of a specialkind. (Mises, On the Manipulation of Money and Credit, p. 125)This is the English translation of a passage found on p. 49 of the bookMises originally published in Jena in 1928. It is entitled, Geldwertstabilisierungund Konjunkturpolitik. Hayek, in his book, Profits, Interest andInvestment, pp. 3–73, presents his theory of the business cycle, starting