Ladies and gentlemen, thank you very much for having me here.
I am very happy to be able to develop one argument of my PhD thesis here.
The first thing I would like to do is to remind you that this session is not dedicated to the celebration of Ludwig von Mises.
Instead, it is the symposium on the centennial of the theory of money and credit.
It is important to keep this in mind.
We have to distinguish between the two.
The one is a person, the other is a book.
In a sense, of course, the two are connected.
Mises is the author of the book in question of the theory of money and credit.
but from a different point of view, it is essential
to keep the book and its author apart.
We've just heard that Nikolai Gatchev has written
about the difference between human action
and the theory of money and credit
concerning Mises' monetary thought.
Mises changed some of his arguments over time,
which of course cannot be said of a book,
which can't be said about the theory of money and credit,
which was published 100 years ago.
At least it cannot be said about the first edition.
As we are celebrating today the book and not its author,
this might be a good opportunity
to do a rather unusual thing,
to defend the book against its own author.
To be precise, I'm going to argue
that at least on one point,
the theory of money and credit has to be preferred
to all later writings by Mises himself,
even and especially to human action.
This one point is an important one, however.
I'm talking about the business cycle theory,
best known as the Austrian theory of the business cycle.
Concerning this theory, I maintain
the theory of money and credit is much more consistent
than the later writings of Ludwig von Mises.
To defend this claim, it is necessary to outline,
at least in a few words, the central idea
of the Austrian Theory of the Business Cycle.
In a nutshell, the theory is mainly concerned
with the effect that the financial sector
of an economy has on the real sector.
Its principal examination object
is the artificial expansion of credit
and the influence this expansion has on the economic system.
As you're all familiar with the theory,
I think that it suffices to highlight those elements
of the theory that are necessary for my point.
As you all know, Mises distinguishes
two different kinds of credit.
Commodity credit and circulation credit or fiduciary credit.
Commodity credit for him is the healthy kind of credit.
Somebody saves out of his income and transfers
these savings to somebody else.
This kind of credit, commodity credit,
is characterized by the fact that they impose a sacrifice
on that party who performs his part of the bargain
before the other does.
The foregoing of immediate power of disposal
over the exchange good.
Circulation credit or fiduciary credit on the other hand
is for Mises the unhealthy kind of credit
or the artificial kind of credit.
The central bank or the banking system
for whoever creates money without any prior savings and grants credit to others, out of thin air, so to speak.
Circulation credits are characterized by the fact that in them the gain of the party who receives before he pays is balanced by no sacrifice on the part of the other party.
So this is the artificial kind of credit for Mises.
Now in all of his versions of the Austrian business cycle theory, Mises maintains that an expansion of this kind of credit, of artificial credit, of circulation credit, causes a boom that must ultimately result in a bust.
So far the earlier and the later versions are homogeneous. They differ in the way that Mises explains the effect that an expansion of circulation credit has on the economy.
And it is here that I consider the theory of money and credit to be superior to human action. Let us see why I think so.
In The Theory of Money and Credit, Mises explains the influence of circulation credit on the economy in terms of the so-called subsistence fund.
This fund consists of consumption goods. These consumption goods are a necessary precondition for every production process.
Without something to eat, something to drink, clothes and so forth, nobody will participate in production.
Workers need consumption goods, otherwise they cannot produce.
This is the main idea of the subsistence fund theory.
And it can be seen in the following quote
from the theory of money and credit.
There, in 1912 and later on, he says,
"'The period of production must be of such a length
"'that exactly the whole available subsistence fund
"'is necessary on the one hand
and sufficient on the other for paying the wages
of the laborers throughout the duration
of the productive process.
So here he highlights the subsistence fund.
In the normal course of things, Mises maintains in 1912,
production adapts itself to the size of the subsistence fund
and you can see this from the following quote,
again from 1912, a lengthening of the period
of production is only practicable when either the means of subsistence have increased or
when the wants of producers have decreased. The businessmen or the producers, of course,
do not orientate themselves by something called the subsistence fund. Mises knew this, of
course. Businessmen orientate themselves by the interest rate. So in the 1912 version
of Mises' Theory of the Business Cycle, a lowering of the interest rate indicates to the businessmen
that the amount of the subsistence fund has increased and that therefore longer production processes
have become feasible and profitable.
In other words, when the interest rate decreases entrepreneurs think that workers can be supplied
with Consumption Goods for a Longer Time and that More Long-Term Projects Can Be Started.
Also from 1912, a reduction of the rate of interest must necessarily lead to a lengthening
of the average period of production. So you see, I don't lie. Now, in the Austrian business cycle
In the Austrian Business Cycle Theory, an expansion of circulation credit disturbs this process.
In the 1912 version of the Austrian Business Cycle Theory, additional circulation credit creates the illusion of an increased subsistence fund, of an increased amount of available consumption goods.
The entrepreneurs start long-term projects, although their workers cannot be supplied with consumption goods for the whole duration of the projects.
Sooner or later, the consumption goods will become scarce, which ultimately will cause a bust.
So here again, from 1912, he explains the busts are following the way, the following way.
A time must necessarily come when the means of subsistence available for consumption are
all used up, although the capital goods employed in production have not yet been transformed
into consumption goods.
The market prices of consumption goods rise and those of production goods fall.
You see, in the theory of money and credit, it is the scarcity of the subsistence fund,
The scarcity of means of subsistence of consumption goods that triggers a crisis in the economy
at the turning point of the business cycle.
This is what I consider to be the consistent version of the Austrian business cycle theory.
In Human Action, however, Mises explains his theory in a different way.
There, it is not the subsistence fund that limits the length of the different production
Expansion Processes, an expansion of circulation credit does not cause the entrepreneurs to
think that the subsistence fund has grown and it is also not the subsistence fund that
becomes scarce at the end of a boom.
Instead, Mises explains his theory in terms of capital goods, that is, in terms of produced
means of production.
A further expansion of production is possible only if the amount of capital goods is increased
by additional saving, that means by surpluses produced and not consumed.
The characteristic mark of the credit expansion boom is that such additional capital goods
have not been made available.
In this version, an artificial credit expansion makes entrepreneurs behave as if the supply
of capital goods had increased, which allegedly is not the case, according to Mises.
This can be again seen from another quote, the entrepreneurs embark upon an expansion
of investment on a scale for which the capital goods available do not suffice.
The projects are unrealizable on account of the insufficient supply of capital goods.
They must fail sooner or later.
Now I believe that this version cannot be upheld.
Additional circulation credit does not create the illusion of an increased stock of capital
goods, and at the turning point of the business cycle, it is not capital goods that become
scarce.
Why do I think so?
Now, in Mises' own definition, capital goods are produced means of production.
So if these produced means of production should happen to become scarce, as Mises maintains
in Human Action, there should arise no problem for the economy.
These capital goods, the produced means of production, will become more expensive, of
of course, as they are scarce, and it will be more profitable to produce them, that is it.
This should be the solution. There is no reason why this solution should not work and why a crisis should occur.
There is no bottleneck. The capital goods are produced means of production that can be produced.
Mises does not explain where indeed there is a bottleneck that would stop producers or entrepreneurs to produce these capital goods.
So, I think that one cannot explain the business cycle this way. The scarcity of capital goods cannot cause a bust.
That is why I believe that the Austrian business cycle theory in human action is not consistent.
It does not explain how a bust occurs. It is different with the version that can be found in the theory of money and credit.
As you will remember, there it is, the scarcity of the subsistence fund that triggers the bust.
Concerning the subsistence fund, it cannot be said what I've just said about the capital goods.
When the means of subsistence become scarce, it cannot be argued that this is no problem
because they can easily be produced, like I said about the capital goods.
No, the subsistence fund, a fund of consumption goods, of available consumption goods,
comes into being by people who save, who save parts of their income.
It is necessary that some people abstain from consumption without this,
without savings, no subsistence fund comes into being, is spilled up.
This, I think, this is the problem that causes the crisis.
This indeed is a bottleneck.
People do not save enough, or if people do not save enough, the subsistence fund shrinks
and consequently many investment projects cannot be finished and turn out to be malinvestments.
This problem cannot be healed by production but only by saving.
If people do not save, decreases or if people do not save more the crisis cannot be avoided.
To repeat my point, in human action, it is the capital goods that become scarce, which causes the crisis.
In the theory of money and credit, it is the subsistence fund.
The scarcity of capital goods, however, should be no problem, as they can be produced profitably if needed.
The subsistence fund, on the other hand, comes into being by saving,
and we have no reason to suppose that savings do rise sufficiently to fill up the subsistence fund.
So what I've done here is to celebrate the theory of money and credit.
Concerning the theory of the business cycle, it is in my view, this book, is in my view the best of Mises' writings.
If you have not yet done so, you should study the business cycle theory in The Theory of Money and Credit in detail.
And furthermore, if you are interested in an elaborated version of the Austrian business cycle theory that runs in terms of the subsistence fund,
you should consult the book Capital and Production by Richard von Striegel.
I think Striegel's version of the theory is one that is most congenial to the theory of money and credit.
Thank you very much for your attention.