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

556 Money, Bank Credit, and Economic Cyclesrevived by Marshall, at least regarding the supply side of pricedetermination. 70Hayek has conclusively demonstrated that the entire Keynesiandoctrine of the “marginal efficiency of capital” as thedetermining factor in investment is acceptable only if weassume that there is absolutely no shortage of capital goods,and hence that any quantity can be acquired at a constant,set price. However, this would only be conceivable in amythical economy in which no shortage ever occurs, or in ahypothetical economy in the deepest stages of an extraordinarilysevere depression, and thus where an immensedegree of excess capacity exists. In real life at least some ofthe complementary goods necessary to produce a capitalgood will always become relatively scarce at some point,and entrepreneurs, in keeping with their expectations ofreturns, will increase the amount they are willing to pay forthe good in question until the marginal efficiency or productivityof capital becomes equal to the interest rate. In otherwords, as Hayek indicates, competition among entrepreneurswill ultimately lead them to push up the cost or offering priceof capital goods to the point where it coincides with the presentvalue (the value discounted by the interest rate) of themarginal productivity of the equipment in question. Hencethe “marginal efficiency of capital” will always tend to coincidewith the interest rate. 71 This is precisely the essence of theAustrian theory on the influence of the interest rate on the70 Mr. Keynes . . . is presumably . . . under the influence of the“real cost” doctrine which to the present day plays such alarge rôle in the Cambridge tradition, he assumes that theprices of all goods except the more durable ones are even inthe short run determined by costs. (Hayek, The Pure Theory ofCapital, p. 375, footnote 3)71 Entrepreneurs will still tend to bid up the prices of the variouskinds of input to the discounted value of their respective marginalproducts, and, if the rate at which they can borrow moneyremains unchanged, the only way in which this equalitybetween the price of the input and the discounted value of itsmarginal product can be restored, is evidently by reducing thatmarginal product. (Hayek, The Pure Theory of Capital, p. 383)