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

566 Money, Bank Credit, and Economic CyclesWe know that according to the accelerator principle, anincrease in the demand for consumer goods and servicesbrings about tremendously magnified growth in the demandfor capital goods. However the principle also implies that ifthe demand for capital goods is to remain constant, thedemand for consumer goods and services will have to continueto rise at a progressively increasing rate. This is due tothe fact that a steady demand for consumer goods and services,i.e., a demand which does not increase, will provoke amarked contraction in the demand for equipment goods. Thedemand for these goods will return to the level necessaryfor replacements only. The accelerator principle clearly andperfectly fits the Keynesian prescriptions of an unlimitedexpansion of consumption and aggregate demand: indeed,the accelerator doctrine indicates that any rise in consumptioncauses a huge upsurge in investment, and that saving is of noimportance! Thus the accelerator principle acts as a false substitutefor the capital theory the Keynesian model lacks; iteases the theoretical conscience of Keynesians, and it reinforcestheir belief that voluntary saving is counterproductiveand unnecessary for economic development (the “paradox ofyearly sales of cloth. Thus, when its sales have remained at$30 million per year for some time, its balance sheet will show$60 million of capital equipment, consisting of perhaps 20machines of different ages, with 1 wearing out each year andbeing replaced. Because replacement just balances depreciation,there is no net investment or saving being done by thecorporation. Gross investment takes place at the rate of $3 millionper year, representing the yearly replacement of 1machine. . . . Now let us suppose that, in the fourth year, salesrise 50 per cent—from $30 to $45 million. Then the number ofmachines must also rise 50 per cent, or from 20 to 30machines. In that fourth year, instead of 1 machine, 11machines must be bought—10 new ones in addition to thereplacement of the worn-out one. Sales rose 50 per cent. Howmuch has machine production gone up? From 1 machine to11; or by 1,000 percent! (Samuelson, Economics, 11th ed. [NewYork: McGraw-Hill, 1980], pp. 246–47)Interestingly, the analysis of the accelerator principle was eliminatedfrom the 15th edition of the book, published in 1992.