LSE Hayek Lecture 2010: Professor Jesús Huerta de Soto from Cobden Centre on Vimeo.
Economic Recessions, Banking Reform, and the Future of Capitalism
The Fatal Error of Peel's Bank Act
The Healthy Process of Capital Accumulation Based on True Savings
The Nature of the Bubbles Induced by Fractional-Reserve Banking
The Spontaneous Reaction of the Market against the Effects of Credit Expansions
- The rise in the price of the original means of production (mainly labor, natural resources, and commodities). This factor appears when these resources have not been liberated from consumer-goods industries (because savings have not increased) and the entrepreneurs of the different stages in the production process compete with each other in demanding the original means of production with the newly created loans they have received from the banking system.
- The subsequent rise in the price of consumer goods at an even quicker pace than that of the rise in the price of the factors of production. This happens when time preference remains stable and the new money created by banks reaches the pockets of the consumers in an environment in which entrepreneurs are frantically trying to produce more for distant consumption and less for immediate consumption of all kinds of goods. This also explains the third factor, which is
- The substantial relative increase in the accounting profits of companies closest to final consumption, especially compared with the profits of capital-goods industries, which begin to stagnate when their costs rise more rapidly than their turnover.
- The Ricardo effect, which exerts an impact that is exactly opposite to the one it exerted when there was an increase in voluntary saving. Now the relative rise in the prices of consumer goods (or of consumer industries' turnover in an environment of increased productivity) with respect to the increase in original-factor income begins to drive down real wages, motivating entrepreneurs to substitute cheaper labor for machinery, which lessens the demand for capital goods and further reduces the profits of companies operating in the stages furthest from consumption.
- The increase in the loan rate of interest even exceeding pre-credit-expansion levels. This happens when the pace of credit expansion stops accelerating, something that sooner or later always occurs. Interest rates significantly increase due to the higher purchasing power and risk premiums demanded by the lenders. Furthermore, entrepreneurs involved in malinvestments start a "fight to the death" to obtain additional financing to try to complete their investment projects (Hayek 1937).
- Companies that operate in the stages relatively more distant from consumption begin to discover they are incurring heavy accounting losses. These accounting losses, when compared with the relative profits generated in the stages closest to consumption, finally reveal beyond a doubt that serious entrepreneurial errors have been committed and that there is an urgent need to correct them by paralyzing and liquidating the investment projects mistakenly launched during the boom years.
The Specific Features of the 2008 Financial Crisis and the Current Economic Recession
The Negative Influence of the New Accounting Rules
Who Is Responsible for the Current Situation?
Possible Future Scenarios and the Most Appropriate Economic Policy
Hayek, Friedrich A. (1937), "Investment that Raises the Demand for Capital", Review of Economics and Statistics, 19, no. 4. Reprinted in Profits, Interest and Investment, pp. 73-82.