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

568 Money, Bank Credit, and Economic Cyclesgoods and services. The accelerator principle fails to take intoaccount that the same result in terms of consumer goods and servicescan be achieved using many different combinations of fixed capital,variable capital and especially, labor. The specific combinationan entrepreneur may choose in any given case dependson the structure of relative prices. Hence, to assume fixed proportionsexist between the output of consumer goods andservices and the quantity of capital goods necessary to producethem is an error, and it contradicts the basic principles ofthe theory of prices in the factor market. Indeed, as we sawwhen we analyzed the “Ricardo Effect,” a drop in the relativeprice of labor will lead companies to produce consumer goodsand services in a more labor-intensive manner, i.e., usingfewer capital goods in relative terms. The reverse is also true:a rise in the relative cost of labor will trigger a relative increasein the use of capital goods. Because the accelerator principlerests on the assumption that fixed proportions exist betweenthe factors of production, it totally excludes the role entrepreneurship,the price system and technological change play inmarket processes.Furthermore, and third, even if, for the sake of argument,we suppose fixed ratios exist between consumption and capitalequipment used, and we even assume there to be no idlecapacity with respect to capital goods, we must ask ourselvesthe following question: How can the output of capital goods possiblyrise in the absence of the saving necessary to finance such aninvestment? It is an insoluble logical contradiction to considerthat an increase in the demand for consumer goods andservices will automatically and instantaneously provoke amuch-more-than-proportional rise in the output of capitalgoods, given that in the absence of excess capacity the productionof these goods is contingent on growth in voluntarysaving. Moreover such growth inevitably entails a momentarydrop in the demand for consumer goods (which clearly contradictsthe premise on which the accelerator theory is based).Therefore the accelerator theory contradicts the most fundamentalprinciples of capital theory.Fourth, it is important to realize that an investment in capitalgoods which is far more than proportional to the increase