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

A Critique of Monetarist and Keynesian Theories 567thrift”). Therefore it is particularly important that we thoroughlyexpose the errors and fallacies which form the basis ofthe principle. 81The theory based on the accelerator not only omits themost elementary principles of capital theory; it was alsodeveloped based on a mechanistic, automatic and fallaciousconception of economics. Let us analyze each of the reasonsbehind this assertion.First, the accelerator theory excludes the real functioningof the entrepreneurial market process and suggests that entrepreneurialactivities are nothing more than a blind, automaticresponse to momentary impulses in the demand for consumergoods and services. However entrepreneurs are not robots,and their actions are not mechanical. On the contrary, entrepreneurspredict the course of events, and with the purpose ofobtaining a profit, they act in light of what they believe mayhappen. Hence no transmitter mechanism automatically andinstantaneously determines that growth in the demand for consumergoods and services will trigger an immediate, proportional increasein the demand for capital goods. Quite the opposite is true. Inview of potential variations in the demand for consumergoods and services, entrepreneurs usually maintain a certainamount of idle capacity in the form of capital equipment.This idle capacity allows them to satisfy sudden increases indemand when they occur. The accelerator principle proves tobe much less sound when, as in real life, companies keep somecapital goods in reserve.Therefore it is obvious that the accelerator principle wouldonly be sound if capital goods were in full use, such that itwould be impossible to raise the output of consumer goods atall without increasing the number of machines. Nevertheless,and second, the great fallacy of the accelerator principle is thatit depends on the existence of fixed, unchanging proportionsbetween capital goods, labor and the output of consumer81 Antecedents of the “accelerator principle” appear in the works of KarlMarx, Albert Aftalion, J.M. Clark, A.C. Pigou, and Roy F. Harrod. SeeP.N. Junankar, “Acceleration Principle,” in The New Palgrave: A Dictionaryof Economics, Eatwell, Milgate and Newman, eds., vol. 1, pp. 10–11.