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

A Critique of Monetarist and Keynesian Theories 537profit motive will inevitably lead them to take advantage ofthe newly-created money. In fact even if they understand thedangers of lengthening the productive structure without thebacking of real savings, they can easily derive large profitsby accepting the newly-created loans and investing thefunds in new projects, provided they are capable of withdrawingfrom the process in time and of selling the new capital goods athigh prices before their market value drops, an event which heraldsthe arrival of the crisis. 42 Indeed entrepreneurial profits arise42 In light of the above considerations, the following remark Ludwig vonMises makes seems a bit exaggerated (see his article, “Elastic Expectationsin the Austrian Theory of the Trade Cycle,” published in Economica[August 1943]: 251–52):The teachings of the monetary theory of the trade cycle aretoday so well known even outside of the circle of economists,that the naive optimism which inspired the entrepreneurs inthe boom periods has given way to a greater skepticism. Itmay be that businessmen will in the future react to creditexpansion in another manner than they did in the past. It maybe that they will avoid using for an expansion of their operationsthe easy money available, because they will keep inmind the inevitable end of the boom. Some signs forebodesuch a change. But it is too early to make a positive statement.Although it is obvious that “correct” expectations of the course eventswill take will hasten their arrival and make credit expansion less “effective”than it would be under other circumstances, even if entrepreneurshave “perfect” knowledge of the typical characteristics of the cycle, theycannot forgo the profits which, in the short run, credit expansion givesthem, especially if they believe they are capable of predicting the appropriatetime to sell their capital goods and avoid the corresponding losses.Mises himself, in Human Action (p. 871), makes the following clarification:What the individual businessman needs in order to avoidlosses is knowledge about the date of the turning point at atime when other businessmen still believe that the crash isfarther away than is really the case. Then his superior knowledgewill give him the opportunity to arrange his own operationsin such a way as to come out unharmed. But if the endof the boom could be calculated according to a formula, allbusinessmen would learn the date at the same time. Theirendeavors to adjust their conduct of affairs to this informationwould immediately result in the appearance of all the