Prosperity and Depression.pdf

Chap. 3 The Over-investment Theories 49must be permanently modified because, by the act of saving, thestock of capital, as well as the volume of transactions in capitalgoods, has been permanently increased.An analogous change in the· proportion between.money spentfor consumers' and producers' goods may be induced by injectionsof bank credits for production purposes. But in that case, incontra.distinction to the case of voluntary saving, there isa strongprobability that individuals will tend to restore the old proportion." Now, the sacrifice is not voluntary and is not made bythose who will reap the benefit from the new investments. It ismade by consumers in general who, because of the increased competitionfrom the entrepreneurs who have received the additionalmoneyt are forced to forgo part ofwhat they used to consume .••There can be no doubt that, if their money receipts should riseagain, they would immediately attempt to expand consumptionto the usual proportion. "1 And receipts will rise sooner or later,for the new money is spent partly to hire labourers, partly to buycapital goods of all sorts; and in both cases the money, partly atonce, partly after a while,· becomes additional income in the handsof the owners of the factors of production.There is another factor which tends to swell theFaulty demand for consumers' goods. Bookkeeping isbookkeeping more or less based on the assumption of a constantpractices. value of money. Periods of major inflations haveshown that this tradition is very deeply rooted andthat long and disagreeable experiences are necessary to changethe habit. One of the consequences is that durable means ofproduction-such as machines and factory buildings-figure incost accounts at the actual cost of acquisition, and are written offon that basis.· If prices rise, this procedure is illegitimate. Theenhanced replacement cost should be substituted for the originalcost of acquisition. This, however, is not done, or is done onlyto an insufficient extent and only after prices have risen considerably.The consequence is that too little is written off, paperprofits appear, 2 and the entrepreneur is tempted to increase his1 IIayek : Prices and Production, 2nd ed., London, 1934, page 57.t These paper profits are also likely to add to the cumulative force ofthe upswing, because they stimulate borrowers and lenders to borrow