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

520 Money, Bank Credit, and Economic Cyclesof capital is far from being impossible or improbable. Capitalis not necessarily perpetual. 12Realizing the debate between the two sides is not pointless,as it involves the clash of two radically incompatible conceptionsof economics (namely subjectivism versus objectivismbased on general equilibrium), Hayek also attacked Clark andKnight’s position, which he felt rested on the following essentialerror:This basic mistake—if the substitution of a meaninglessstatement for the solution of a problem can be called a mistake–isthe idea of capital as a fund which maintains itselfautomatically, and that, in consequence, once an amount ofcapital has been brought into existence the necessity ofreproducing it presents no economic problem. 13Hayek insists that the debate on the nature of capital is notmerely terminological. On the contrary, he emphasizes thatthe mythical conception of capital as a self-sustaining fund ina production “process” which involves no time prevents itsown proponents from identifying, on the whole, the importanteconomic issues in real life. In particular it blinds them tovariations in the productive structure which result fromchanges in the level of voluntary saving, and to the wayscredit expansion affects the structure of production. In otherwords the mythical concept of capital keeps its supportersfrom understanding the close relationship between the microand macro aspects of economics, since the connection between12 Fritz Machlup, “Professor Knight and the ‘Period of Production,’” p.580, reprinted in Israel M. Kirzner, ed., Classics in Austrian Economics,vol. 2, chap. 20, pp. 275–315.13 F.A. Hayek, “The Mythology of Capital,” Quarterly Journal of Economics(February 1936): 203. Several years later, Hayek added:I am afraid, with all due respect to Professor Knight, I cannottake this view seriously because I cannot attach any meaningto this mystical “fund” and I shall not treat this view as a seriousrival of the one here adopted. (Hayek, The Pure Theory ofCapital, p. 94)