Freedom, Society, and State - Ludwig von Mises Institute

per c e i vet h e act u 8 1 e conom i cstate 0 f a f fa irs? Sin c e
the Austrians contend that the unhampered market is alwayshea
dj ng for equi 1 i b I' i urn, the I' e i s not h i nginher en t
in the market process to account for this sudden cluster
of errors, and thus for the cycle. Individual entrepreneurs
may well make isolated errors, but the
sudden emergence of mass entrepreneurial error must
have some general cause. Since the only thing that ties
the va rio u s rnark e t s tog e the I' i s rno ne y, the Au s t ria n s
argue that the trade cycle can only be explained by a
monetary theory.(64)
The rate of interest is the crucial factor in the
Austr ian theory. The interest rate serves to allocate
resources between the consumer and capital goods industr
ies so that the entire structure of production is in
congruence wi th the. "social rate of time preference,"
i. e., the general demand for consumpt ion goods immediately
-- consumer goods demand -- relative to the demand
for consumption goods in the future -- capital
goods demand. Interest, in other words, is the payment
for the use of one's savings for a particular length of
time; and the rate of interest is simply that price
that will insure that at any particular time all that
iss a v e d will be i n ve s ted, i. e ., t hat the dema nd for
sa vi ngs wi 11 equal the supply of savings. The point at
which equilibrium is reached is referred to as the
"natural rate of interest."
The problem is that an increase in the supply of
money, and it should be noted not of actual savings,
wi 11 upset this equil ibrium. If banks suddenly obtained
additional money they would be unable to loan it out
at the prevailing rate of interest and would conseque
n t 1Y be for cedt 0 lower the i r rat e • In t his wa y
the ma I' k e t I' ate 0 fin tel'est dev i ates from the nat ur a 1
rate. At this lower market rate of interest some ventures
that were once too costly now appear profitable.
Since interest is the payment for time and since
there is more production time involved in the capital
goods industries than in the consumer goods industries,
the change in the rate of interest has its biggest impact
on the former. In other words, since the costs of
production in the capital goods industries declines
wit h the dec 1 i n e i ntherateofin t ere s t, pI' 0 fit rna rgins
are correspondingly increased. Spurred by these
profIts, entrepreneurs will expand production of capital
goods. Factor pI' ices then begin to rise as producers
of these goods begin to bid factors away from
producers of consumer goods.
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