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

Additional Considerations on the Theory of the Business Cycle 443consumer goods and services. The relative prices of thesegoods and services rise more rapidly than the prices of productsfrom the stages furthest from consumption, thus diminishingreal relative wages and setting off the “Ricardo Effect”and the other effects which lead to crisis and recession. In anycase credit expansion will always, from the outset, cause amore-than-proportional increase in the relative price of productsfrom the stages furthest from consumption. This risestems from the new monetary demand credit generates forthese goods and from the artificial reduction in the interestrate, which makes such projects more attractive. This results ina lengthening of the productive structure, a change which cannotbe maintained in the long run and which is completelyindependent of whether previously-idle resources have beenused in some of such projects.Therefore the common argument that the theory developedby Mises, Hayek, and the Austrian School rests on theexistence of a full employment of resources is fallacious. Evenif we suppose high unemployment exists, the credit expansionprocess invariably leads to a recession. 4141 Thus it becomes obvious how vain it is to justify a new creditexpansion by referring to unused capacity, unsold—or, as peoplesay incorrectly, “unsalable”—stocks, and unemployedworkers. The beginning of a new credit expansion runs acrossremainders of preceding malinvestment and malemployment,not yet obliterated in the course of the readjustment process,and seemingly remedies the faults involved. In fact, however,this is merely an interruption of the process of readjustmentand of the return to sound conditions. The existence ofunused capacity and unemployment is not a valid argumentagainst the correctness of the circulation credit theory. (Mises,Human Action, p. 580)Hayek arrives at a similar conclusion, though his reasoning differsslightly:If the proportion as determined by the voluntary decisions ofindividuals is distorted by the creation of artificial demand, itmust mean that part of the available resources is again ledinto a wrong direction and a definite and lasting adjustmentis again postponed. And, even if the absorption of the unemployedresources were to be quickened in this way, it would