Prices, and Production: Lecture III, Part VI
At last, an answer to the question
posed in the first lecture, that of how it comes about that the
economy cannot utilizes all existing resource (which Hayek attests is
“the central task of any theory of industrial fluctuations”),
and without having to base the analysis on the assumption that unused
resources exist. Rather than elucidating the process of economic
recovery, Hayek felt that is was more worthwhile to discuss important
conclusions of the preceding theory.
Based on the business cycle contained
in the preceding lecture, it is all by certain that granting credits
to consumers, which has been lauded as a method of curing depressions
by increasing consumer demand, would only worsen a depression. A
relative increase in the demand for consumer goods would only make
affairs worse by further skewing a structure of production that is in
the process of reallocating resources in a sustainable arrangement
after a prior boom-bust cycle. All that those consumer credits would
do is a further delaying of a long-term structure of production based
on the demands of the market.
However, producers' credits are not so
simple. In theory, it is at least plausible that the granting of
producers' credits could have a beneficial effect when, in the acute
stages of the recession, the structure of production shrinks more
than what would be necessary. This would only be the case if the
quantity were regulated so to compensate for the initial rise in the
prices of consumer goods compared to producers', and if arrangements
were made to withdrawal the additional money as the prices fall as
the proportion between the supply of the two adapts itself with the
demand for the two. Nevertheless, the credits would do more harm than
good if their quantity were not strictly regulated, and Hayek's later
essay: “The Use of Knowledge in Society”shows, sine dubio,
elucidates the impossibility of doing so.
In the end, we return to a time-old
conclusion that the only way of avoiding a recession is to check
credit expansion in time; but, if that proves to be impossible, then
the recession must run its natural course. From the above
investigation, conclusions with regard to the methods used in an
analysis of business fluctuations follow:
The first is that
our explanation of the different behavior of the prices of specific
and nonspecific goods should help to substitute for the rough
empirical classifications of prices according to their sensitiveness,
a classification built upon more rational considerations. The second,
that the average movements of general prices show us nothing of the
really relevant facts; indeed, the index numbers generally used will,
as a general rule, fail even to attain their immediate object
because, being for practical reasons almost exclusively based on
prices of goods of a nonspecific character, the data used are never
random samples in the sense required by statistical method, but
always a biased selection which can give only a picture of the
peculiar movements of prices of goods of this class. And third is
that for similar reasons every attempt to find a statistical measure
in the form of a general average of the total volume of production,
or the total volume of trade, or general business activity, or
whatever one may call it, will only result in veiling the really
significant phenomena, the changes in the structure of production to
which I have been drawing your attention in the last two lectures.