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

A Critique of Monetarist and Keynesian Theories 569in the demand for consumer goods can only be financed ifsubstantial credit expansion is initiated and sustained. Inother words, the accelerator principle ultimately presupposesthat the increase in credit expansion necessary to stimulate anenormously exaggerated investment in capital goods takesplace. We are already familiar with the effects such creditexpansion exerts on the productive structure and with theway in which the relative-price system invariably limits theexpansion and forces a reversal that manifests itself in a crisisand recession. 82Fifth, it is absurd to expect a rise in the demand for consumergoods and services to cause an instantaneous upsurgein the output of capital goods. We know that during the boom,which is financed by credit expansion, companies and industrialsectors devoted to the production of equipment and capitalgoods operate at maximum capacity. Orders pile up andcompanies are unable to satisfy the increased demand, exceptwith very lengthy time lags and dramatic increases in the priceof equipment goods. Therefore it is impossible to imagine thata rise in the output of capital goods could take place as soonas the accelerator principle presupposes.Sixth, the accelerator theory rests on peculiar mechanisticreasoning by which an attempt is made to relate growth in thedemand for consumer goods and services, measured in monetaryterms, with a rise, in physical terms, in the demand forequipment and capital goods. Entrepreneurs never base theirdecisions on a comparison between monetary and physicalmagnitudes; instead they always compare estimated incomeand costs, measured strictly in monetary terms. To compare82 [I]f, for the sake of argument, we were ready to admit thatcapitalists and entrepreneurs behave in the way that the disproportionalitydoctrines describe, it remains inexplicablehow they could go on in the absence of credit expansion. Thestriving after such additional investments raises the prices ofthe complementary factors of production and the rate ofinterest on the loan market. These effects would curb theexpansionist tendencies very soon if there were no creditexpansion. (Mises, Human Action, p. 586)