Austrian Macroeconomics - Ludwig von Mises Institute

liquidated or abandoned in favor ofthe configuration Oy"F II
T II
which approximates the original structure. The investment (and
subsequent dis-investment) represented in panel III by Kol' is
not the result ofvoluntary saving (and voluntary dissaving) but is
the result of the monetary disturbance. This is what Mises
termed malinvestment51 and what Hayek called forced savings.
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The changes in the real-world structure of production can be
described in terms ofthe relative profitability ofshort-term and
long-term projects. The economy is assumed· to be in equilibrium
prior to the monetary expansion so that all projects (shortterm
and long-term) are equally profitable at the margin. When
the interest rate falls, due to the expansion of credit, the longterm
projects, which by definition involve disproportionately
high interest expenditures, appear to become more profitable.
Thus, the capitalists in their entrepreneurial roles bid labor and
non-specific capital away from the later stages ofproduction and
into the earlier stages and begin construction of whatever
specific capital is needed to take advantage of the (apparent)
profitability of these long-term projects. But in the very process
of constructing the new structure of production the newly
created money flows from the capitalists to the· laborers, and the
distribution of money comes to approximate the old, preexpansion,
distribution. The laborers, whose tastes have remained
unchanged, and who now have their full share of the
new money, will bid for consumption goods in an amount consistent
with the old, pre-expansion, structure of production. That
is, they are unwilling to forgo current consumption and to wait
instead for the consumption goods associated with the new
long-term projects. Their time preferences have not changed.
With their bidding for consumption goods the rate of interest
rises back to somewhere near its original level. The long-term
projects that appeared to be profitable during the expansion are
revealed to be unprofitable. The capitalists must act now to cut
their losses. The minimizing of losses may require that some of
the new long-term projects be completed. Others, however, will
have to be liquidated. The specific capital associated with them
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