Prosperity and Depression.pdf

AnalYsis of TheoriesPart Ibut only the absorption of unused resources predominantly inthose~ stages of production which are especially stimulated by theexpansion-namely, in the upper stages (capital goods industries).Arguing along the lines of the theory under review, one has toassume that the unemployed resources are mainly put to workin the higher stages (capital-goods industries). But, so longas there is a reserve of unemployed resources, the reaction fromexcess investment, which consists (as we have seen) of acomparative rise in the demand for consumers' goods, will notproduce a breakdown, since there is no necessity to detach factorsof production from the higher stages. Prices need not rise much.The expansion ofcredit can go on.This process has never been analysed so closely as the processof expansion starting from a position offull employment.! But,applying the same type of reasoning, the conclusion seems to beas follows : A disequilibrium between the higher and the lowerstages is produced by the fact that the unemployed resources arenot distributed among the different stages of production in theway they ought to be if ultimate equilibrium is to emerge. A­larger amount is absorbed into the higher stages than can inthe long run he employed there with the given rate of voluntarysaving. Thus the recovery from the depth ofthe depression hasa wrong twist from the beginning.§ 7. RHYTHM AND PERIODICITYProfessor MISES gives the following answer toThe ideological the question why the cycle of prosperity andbasis depression recurs again and again. 2 The behaviourof inflation. of the banks is responsible for the occurrence ofthe business cycle. If the banks did not push themoney rate below the natural rate by expanding credit, equilibriumwould not be disturbed. But why do the banks make the samemistake again and again? "The answer must be : because the1 See, however, Bresciani-Turroni, If The Theory of Saving" in Economica,May 1936, pages 172-174.11 Geldwertstabilisierung und Konjunkturpolitik, Jena, 1928, pages 56-6r.