18. The Fallacy of the Acceleration Principle

The “acceleration principle” has been adopted by some Keynesians as their explanation of investment, then to be combined with the “multiplier” to yield various mathematical “models” of the business cycle. The acceleration principle antedates Keynesianism, however, and may be considered on its own merits. It is almost always used to explain the behavior of investment in the business cycle.

The essence of the acceleration principle may be summed up in the following illustration:

Let us take a certain firm or industry, preferably a first-rank producer of consumers’ goods. Assume that the firm is producing an output of 100 units of a good during a certain period of time and that 10 machines of a certain type are needed in this production. If the period is a year, consumers demand and purchase 100 units of output per year. The firm has a stock of 10 machines. Suppose that the average life of a machine is 10 years. In equilibrium, the firm buys one machine as replacement every year (assuming it had bought a new machine every year to build up to 10).⁷⁸ Now suppose that there is a 20-percent increase in the consumer demand for the firm's output. Consumers now wish to purchase 120 units of output. Assuming a fixed ratio of capital investment to output, it is now necessary for the firm to have 12 machines (maintaining the ratio of one machine: 10 units of annual output). In order to have the 12 machines, it must buy two additional machines this year. Add this demand to its usual demand of one machine, and we see that there has been a 200-percent increase in demand for the machine. A 20-percent increase in demand for the product has caused a 200-percent increase in demand for the capital good. Hence, say the proponents of the acceleration principle, an increase in consumption demand in general causes an enormously magnified increase in demand for capital goods. Or rather, it causes a magnified increase in demand for “fixed” capital goods, of high durability. Obviously, capital goods lasting only one year would receive no magnification effect. The essence of the acceleration principle is the relationship between the increased demand and the low level of replacement demand for a durable good. The more durable the good, the greater the magnification and the greater, therefore, the acceleration effect.

Now suppose that, in the next year, consumer demand for output remains at 120 units. There has been no change in consumer demand from the second year (when it changed from 100 to 120) to the third year. And yet, the accelerationists point out, dire things are happening in the demand for fixed capital. For now there is no longer any need for firms to purchase any new machines beyond what is necessary for replacement. Needed for replacement is still only one machine per year. As a result, while there is zero change in demand for consumers’ goods, there is a 200-percent decline in demand for fixed capital. And the former is the cause of the latter. In the long run, of course, the situation stabilizes into an equilibrium with 120 units of output and one unit of replacement. But in the short run there has been consequent upon a simple increase of 20 percent in consumer demand, first a 200-percent increase in the demand for fixed capital, and next a 200-percent decrease.

To the upholders of the acceleration principle, this illustration provides the key to some of the main features of the business cycle: the greater fluctuations of fixed capital-goods industries as compared with consumers’ goods, and the mass of errors revealed by the crisis in the investment goods industries. The acceleration principle leaps boldly from the example of a single firm to a discussion of aggregate consumption and aggregate investment. Everyone knows, the advocates say, that consumption increases in a boom. This increase in consumption accelerates and magnifies increases in investment. Then, the rate of increase of consumption slows down, and a decline is brought about in investment in fixed capital. Furthermore, if consumption demand declines, then there is “excess capacity” in fixed capital—another feature of the depression.

The acceleration principle is rife with error. An important fallacy at the heart of the principle has been uncovered by Professor Hutt.⁷⁹ We have seen that consumer demand increases by 20 percent; but why must two extra machines be purchased in a year? What does the year have to do with it? If we analyze the matter closely, we find that the year is a purely arbitrary and irrelevant unit even within the terms of the example itself. We might just as readily take a week as the period of time. Then we would have to say that consumer demand (which, after all, goes on continuously) increases 20 percent over the first week, thereby necessitating a 200-percent increase in demand for machines in the first week (or even an infinite increase if the replacement does not precisely occur in the first week), followed by a 200-percent (or infinite) decline in the next week, and stability thereafter. A week is never used by the accelerationists because the example would then be glaringly inapplicable to real life, which does not see such enormous fluctuations in the course of a couple of weeks. But a week is no more arbitrary than a year. In fact, the only nonarbitrary period to choose would be the life of the machine (e.g., 10 years). Over a ten-year period, demand for machines had previously been ten (in the previous decade), and in the current and succeeding decades it will be 10 plus the extra two, i.e., 12. In short, over the 10-year period the demand for machines will increase precisely in the same proportion as the demand for consumers’ goods—and there is no magnification effect whatever.

Since businesses buy and produce over planned periods covering the life of their equipment, there is no reason to assume that the market will not plan production suitably and smoothly, without the erratic fluctuations manufactured by the model of the acceleration principle. There is, in fact, no validity in saying that increased consumption requires increased production of machines immediately; on the contrary, it is only increased saving and investment in machines, at points of time chosen by entrepreneurs strictly on the basis of expected profit, that permits increased production of consumers’ goods in the future.

Secondly, the acceleration principle makes a completely unjustified leap from the single firm or industry to the whole economy. A 20-percent increase in consumption demand at one point must signify a 20-percent drop in consumption somewhere else. For how can consumption demand in general increase? Consumption demand in general can increase only through a shift from saving. But if saving decreases, then there are less funds available for investment. If there are less funds available for investment, how can investment increase even more than consumption? In fact, there are less funds available for investment when consumption increases. Consumption and investment compete for the use of funds.

Another important consideration is that the proof of the acceleration principle is couched in physical rather than monetary terms. Actually, consumption demand, particularly aggregate consumption demand, as well as demand for capital goods, cannot be expressed in physical terms; it must be expressed in monetary terms, since the demand for goods is the reverse of the supply of money on the market for exchange. If consumer demand increases either for one good or for all, it increases in monetary terms, thereby raising prices of consumers’ goods. Yet we notice that there has been no discussion whatever of prices or price relationships in the acceleration principle. This neglect of price relationships is sufficient by itself to invalidate the entire principle.⁸⁰ The acceleration principle simply glides from a demonstration in physical terms to a conclusion in monetary terms.

Furthermore, the acceleration principle assumes a constant relationship between “fixed” capital and output, ignoring substitutability, the possibility of a range of output, the more or less intensive working of factors. It also assumes that the new machines are produced practically instantaneously, thus ignoring the requisite period of production.

In fact, the entire acceleration principle is a fallaciously mechanistic one, assuming automatic reactions by entrepreneurs to present data, thereby ignoring the most important fact about entrepreneurship: that it is speculative, that its essence is estimating the data of the uncertain future. It therefore involves judgment of future conditions by businessmen, and not simply blind reactions to past data. Successful entrepreneurs are those who best forecast the future. Why can't the entrepreneurs foresee the supposed slackening of demand and arrange their investments accordingly? In fact, that is what they will do. If the economist, armed with knowledge of the acceleration principle, thinks that he will be able to operate more profitably than the generally successful entrepreneur, why does he not become an entrepreneur and reap the rewards of success himself? All theories of the business cycle attempting to demonstrate general entrepreneurial error on the free market founder on this problem. They do not answer the crucial question: Why does a whole set of men most able in judging the future suddenly lapse into forecasting error?

A clue to the correct business cycle theory is contained in the fact that buried somewhere in a footnote or minor clause of all business cycle theories is the assumption that the money supply expands during the boom, in particular through credit expansion by the banks. The fact that this is a necessary condition in all the theories should lead us to explore this factor further: perhaps it is a sufficient condition as well. But, as we have seen above, there can be no bank credit expansion on the free market, since this is equivalent to the issue of fraudulent warehouse receipts. The positive discussion of business cycle theory will have to be postponed to the next chapter, since there can be no business cycle in the purely free market.

Business-cycle theorists have always claimed to be more “realistic” than general economic theorists. With the exceptions of Mises and Hayek (correctly) and Schumpeter (fallaciously), none has tried to deduce his business cycle theory from general economic analysis.⁸¹ It should be clear that this is required for a satisfactory explanation of the business cycle. Some, in fact, have explicitly discarded economic analysis altogether in their study of business cycles, while most writers use aggregative “models” with no relation to a general economic analysis of individual action. All of these commit the fallacy of “conceptual realism”—i.e., of using aggregative concepts and shuffling them at will, without relating them to actual individual action, while believing that something is being said about the real world. The business-cycle theorist pores over sine curves, mathematical models, and curves of all types; he shuffles equations and interactions and thinks that he is saying something about the economic system or about human action. In fact, he is not. The overwhelming bulk of current business cycle theory is not economics at all, but meaningless manipulation of mathematical equations and geometric diagrams.⁸²

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¹Cf. Edwin Cannan, “The Application of the Theoretical Analysis of Supply and Demand to Units of Currency” in F.A. Lutz and L.W. Mints, eds., Readings in Monetary Theory (Philadelphia: Blakiston, 1951), pp. 3–12, and Cannan, Money (6th ed.; London: Staples Press, 1929), pp. 10–19, 65–78.

²From this point on, this nonmonetary demand is included, for convenience, in the “total demand for money.”

³Cf. Irving Fisher, The Purchasing Power of Money (2nd ed.; New York: Macmillan & Co., 1913).

⁴A typical such classification can be found in Lester V. Chandler, An Introduction to Monetary Theory (New York: Harper & Bros., 1940).

⁵See Mises, Theory of Money and Credit, p. 98. The entire volume is indispensable for the analysis of money. Also see Mises, Human Action, chap. xvii and chap. xx.

⁶See chapter 12 below for a discussion of the concept of social benefit or social utility.

⁷J.M. Keynes’ Treatise on Money (New York: Harcourt, Brace, 1930) is a classic example of this type of analysis.

⁸On the clearing system, see Mises, Theory of Money and Credit, pp. 281–86.

⁹Since no one can receive a money income unless someone else makes a money expenditure on his services. (See chapter 3 above.)

¹⁰Strictly, the ceteris paribus condition will tend to be violated. An increased demand for money tends to lower money prices and will therefore lower money costs of gold mining. This will stimulate gold mining production until the interest return on mining is again the same as in other industries. Thus, the increased demand for money will also call forth new money to meet the demand. A decreased demand for money will raise money costs of gold mining and at least lower the rate of new production. It will not actually decrease the total money stock unless the new production rate falls below the wear-and-tear rate. Cf. Jacques Rueff, “The Fallacies of Lord Keynes’ General Theory” in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton, N.J.: D. Van Nostrand, 1960), pp. 238–63.

¹¹See the excellent article by W.H. Hutt, “The Significance of Price Flexibility” in Hazlitt, Critics of Keynseian Economics, pp. 383–406.

¹²The term generally used is “national” income. However, in a free-market economy the nation will no more be an important economic boundary than the village or region. It is more convenient, then, to set aside regional problems for other analysis and to concentrate on aggregate social income; this is especially true since regions do not present a problem to economic theory until their governments begin intervening in the free market.

¹³Thus, see the revealing article by Franco Modigliani, “Liquidity Preference and the Theory of Interest and Money” in Hazlitt, Critics of Keynesian Economics, pp. 156–69. Also see the articles by Erik Lindahl, “On Keynes’ Economic System—Part I,” The Economic Record, May, 1954, pp. 19–32; November, 1954, pp. 159–71; and Wassily W. Leontief, “Postulates: Keynes’ General Theory and the Classicists” in S. Harris, ed., The New Economics (New York: Knopf, 1952), pp. 232–42. For an empirical critique of the assumed Keynesian correspondence between aggregate output and employment, see George W. Wilson, “The Relationship between Output and Employment,” Review of Economics and Statistics, February, 1960, pp. 37–43.

¹⁴This is what Keynes’ discussion of “wage units” amounted to. Cf. Lindahl, “On Keynes’ Economic System—Part I,” p. 20.

¹⁵Cf. Lindahl, “On Keynes’ Economic System—Part I,” pp. 25, 159ff. Lindahl's articles provide a good summary as well as a critique of the Key-nesian system.

¹⁶Furthermore, inflation is, at best, an inefficient and distortive substitute for flexible wage rates. For inflation affects the entire economy and its prices, while particular wage rates will fall only to the extent necessary to “clear” the market for the particular labor factor. Thus, freely flexible wage rates will fall only in those fields necessary to eliminate unemployment in those particular areas. Cf. Henry Hazlitt, The Failure of the “New Economics” (Princeton, N.J.: D. Van Nostrand, 1959), pp. 278 ff.

¹⁷Cf. L. Albert Hahn, The Economics of Illusion (New York: Squier Publishing Co., 1949), pp. 50 ff., 166 ff., and passim.

¹⁸Cf. Hutt, “Significance of Price Flexibility.”

¹⁹Cf. Lindahl's critique of Lawrence Klein's The Keynesian Revolution in “On Keynes’ Economic System—Part I,” p. 162. Also see Leontief, “Postulates: Keynes’ General Theory and the Classicists.”

²⁰Modigliani, “Liquidity Preference and the Theory of Interest and Money,” pp. 139–40.

²¹Ibid., p. 137.

²²See the critique of the Keynesian doctrine by Tjardus Greidanus, The Value of Money (2nd ed.; London: Staples Press, 1950), pp. 194–215, and of the liquidity-preference theory by D.H. Robertson, “Mr. Keynes and the Rate of Interest” in Readings in the Theory of Income Distribution, pp. 439–41. In contrast to Keynes’ famous phrase that the rate of interest is “the reward for parting with liquidity,” Greidanus points out that buying consumers’ goods (or even producers’ goods in Keynes’ sense of “interest”) sacrifices liquidity and yet earns no interest “reward.” Greidanus, Value of Money, p. 211. Also see Hazlitt, Failure of the “New Economics,” pp. 186 ff.

²³Mises, Human Action, pp. 529–30.

²⁴Hutt concludes that equilibrium

is secured when all services and products are so priced that they are (i) brought within the reach of people's pockets (i.e., so that they are purchasable by existing money incomes) or (ii) brought into such a relation to predicted prices that no postponement of expenditure on them is induced. For instance, the products and services used in the manufacture of investment goods must be so priced that anticipated future money incomes will be able to buy the services and depreciation of new equipment or replacement. (Hutt, “Significance of Price Flexibility,” p. 394)

²⁵“Postponements (in purchases) arise because it is judged that a cut in costs (or other prices) is less than will eventually have to take place, or because the rate of fall of costs is insufficiently rapid.” Ibid., p. 395.

²⁶As Hutt points out, if we can conceive of a situation of infinitely elastic liquidity preference (and no such situation has ever existed), then “we can conceive of prices falling rapidly, keeping pace with expectations of price changes, but never reaching zero, with full utilization of resources persisting all the way.” Ibid., p. 398.

²⁷L.M. Lachmann, “Uncertainty and Liquidity Preference,” Economica, August, 1937, p. 301.

²⁸Irving Fisher, The Rate of Interest (New York, 1907), chap. v, xiv; idem, Purchasing Power of Money, pp. 56–59.

²⁹For an exposition of the feasibility of private coinage, see Spencer, Social Statics, pp. 438–39; Charles A. Conant, The Principles of Money and Banking (New York: Harper & Bros., 1905), I, 127–32; Lysander Spooner, A Letter to Grover Cleveland (Boston: B.R. Tucker, 1886), p. 79; B.W. Barnard, “The Use of Private Tokens for Money in the United States,” The Quarterly Journal of Economics, 1916–17, pp. 617–26.

Recent writers favorable to private coinage include: Everett Ridley Taylor, Progress Report on a New Bill of Rights (Diablo, Calif.: the author, 1954); Oscar B. Johannsen, “Advocates Unrestricted Private Control over Money and Banking,” The Commercial and Financial Chronicle, June 12, 1958, pp. 2622f.; and Leonard E. Read, Government—An Ideal Concept (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1954), pp. 82ff. An economist hostile to market-controlled commodity money has recently conceded the feasibility of private coinage under a commodity standard. Milton Friedman, A Program for Monetary Stability (New York: Fordham University Press, 1960), p. 5.

³⁰Time deposits are, legally, future claims, since banks have a legal right to delay payment 30 days. Moreover, they do not pass as final media of exchange. The latter fact is not determining, however, since a secure claim to a money-substitute is itself part of the money supply. “Idle” cash balances are kept as “time deposits,” just as gold bullion is a more “idle” form of money than coins. The deciding factor, perhaps, is that the 30-day limit is virtually a dead letter, for if a “savings” bank should impose it, a bankrupting “run” on the bank would ensue. Furthermore, actual payments are sometimes made by “cashiers’ checks” on time deposits. Thus, “time” deposits now function as demand deposits and should be treated as part of the money supply. If banks wished to act as genuine savings banks, borrowing and lending credit, they could issue I.O.U's for specified lengths of time, due at definite future dates. Then no confusion or possible “counterfeiting” could arise.

³¹Such items as bills of lading, pawn tickets, and dock warrants have been warehouse receipts rooted in the specific objects deposited, in contrast to the loose “general deposits” where a homogeneous good can be returned. See W. Stanley Jevons, Money and the Mechanism of Exchange (16th ed.; London: Kegan Paul, Trench, Trübner & Co., 1907), pp. 201–11.

³²We might ask why the owners of the bank do not really reap the spoils and lend the money to themselves. The answer is that they once did so profusely, as the history of early American banking shows. Legal regulations forced the banks to abandon this practice.

³³This discussion is not meant to imply that bankers, particularly at the present time, are always knowingly engaged in fraudulent practices. So embedded, indeed, have these practices become, and always with the sanction of law as well as of sophisticated but fallacious economic doctrines, that it is undoubtedly a rare banker who regards his standard occupational procedure as fraudulent.

³⁴For a brilliant discussion of fractional-reserve banking, see Amasa Walker, The Science of Wealth (3rd ed.; Boston: Little, Brown & Co., 1867), pp. 138–68, 184–232.

³⁵Swiss banks have successfully and for a long time been issuing debentures to the public at varying maturities, and banks in Belgium and Holland have recently followed suit. On the purely free market, such practices would undoubtedly be greatly extended. Cf. Benjamin H. Beck-hart, “ To Finance Term Loans,” The New York Times, May 31, 1960.

³⁶Jevons, Money and the Mechanism of Exchange, pp. 211–12.

³⁷Jevons stated:

If pecuniary promises were always of a special character, there could be no possible harm in allowing perfect freedom in the issue of promissory notes. The issuer would merely constitute himself a warehouse keeper and would be bound to hold each special lot of coin ready to pay each corresponding note. (Ibid., p. 208)

³⁸See Mises, Theory of Money and Credit, pp. 131–45.

³⁹See Mises Human Action, pp. 413–16.

⁴⁰For an appreciation of Mises’ achievement in clarifying this problem, see Wu, An Outline of International Price Theories, pp. 127, 232–34.

⁴¹As we shall see below, however, interlocal clearing can greatly narrow these limits.

⁴²To say that “exports pay for imports” is simply to say that income pays for expenditures.

⁴³For an excellent and original analysis of balances of payments along these lines, see Mises, Human Action, pp. 447–49.

⁴⁴Cf. Mises, Human Action, pp. 459–61.

⁴⁵Mises, Theory of Money and Credit, pp. 285–86.

⁴⁶For recent evidence that this action in the United States was a deliberate “crime against silver,” and not sheer accident, see Paul M.

O'Leary, “The Scene of the Crime of 1873 Revisited,” Journal of Political Economy, August, 1960, pp. 388–92. One argument in favor of such action holds that the government thereby simplified accounts in the economy. However, the market could easily have done so itself by keeping all accounts in gold.

⁴⁷See Mises, Theory of Money and Credit, pp. 179 ff., and Jevons, Money and the Mechanism of Exchange, pp. 88–96. For advocacy of such parallel standards, see Isaiah W. Sylvester, Bullion Certificates as Currency (New York, 1882); and William Brough, Open Mints and Free Banking (New York: G.P. Putnam's Sons, 1894). Sylvester, who also advocated 100-percent specie-reserve currency, was an official of the United States Assay Office.

For historical accounts of the successful working of parallel standards, see Luigi Einaudi, “The Theory of Imaginary Money from Charlemagne to the French Revolution” in F.C. Lane and J.C. Riemersma, eds., Enterprise and Secular Change (Homewood, Ill.: Richard D. Irwin, 1953), pp. 229–61; Robert Sabatino Lopez, “Back to Gold, 1252,” Economic History Review, April, 1956, p. 224; and Arthur N. Young, “Saudi Arabian Currency and Finance,” The Middle East Journal, Summer, 1953, pp. 361–80.

⁴⁸Fisher, Purchasing Power of Money, especially pp. 13 ff.

⁴⁹Ibid., p. 13.

⁵⁰Ibid., p. 14.

⁵¹We are using “dollars” and “cents” here instead of weights of gold for the sake of simplicity and because Fisher himself uses these expressions.

⁵²Fisher, Purchasing Power of Money, p. 16.

⁵³Ibid., p. 17.

⁵⁴Greidanus justly calls this sort of equation “in all its absurdity the prototype of the equations set up by the equivalubrists,” in the modern mode of the “economics of the bookkeeper, not of the economist.” Greidanus, Value of Money, p. 196.

⁵⁵Fisher, Purchasing Power of Money, p. 16.

⁵⁶For a brilliant critique of the disturbing effects of averaging even when a commensurable unit does exist, see Louis M. Spadaro, “Averages and Aggregates in Economics” in On Freedom and Free Enterprise, pp. 140–60.

⁵⁷See Clark Warburton, “Elementary Algebra and the Equation of Exchange,” American Economic Review, June, 1953, pp. 358–61. Also see Mises, Human Action, p. 396; B.M. Anderson, Jr., The Value of Money (New York: Macmillan & Co., 1926), pp. 154–64; and Greidanus, Value of Money, pp. 59–62.

⁵⁸Conventional accounting practice is based on a fixed value of the monetary unit.

⁵⁹Professor Mises has pointed out that the assertion of the mathematical economists that their task is made difficult by the existence of “many variables” in human action grossly understates the problem; for the point is that all the determinants are variables and that in contrast to the natural sciences there are no constants.

⁶⁰See the brilliant critique of index numbers by Mises, Theory of Money and Credit, pp. 187–94. Also see R.S. Padan, “Review of C.M. Walsh's Measurement of General Exchange Value,” Journal of Political Economy, September, 1901, p. 609.

⁶¹Irving Fisher, Stabilised Money (London: George Allen & Unwin, 1935), p. 375.

⁶²The fact that the purchasing power of the monetary unit is not quantitatively definable does not negate the fact of its existence, which is established by prior praxeological knowledge. It thereby differs, for example, from the “competitive price–monopoly price” dichotomy, which cannot be independently established by praxeological deduction for free-market conditions.

⁶³Cited in Wesley C. Mitchell, Business Cycles, the Problem and Its Setting (New York: National Bureau of Economic Research, 1927), pp. 76–77.

⁶⁴See V. Lewis Bassie:

The whole psychological theory of the business cycle appears to be hardly more than an inversion of the real causal sequence. Expectations more nearly derive from objective conditions than produce them. . . . It is not the wave of optimism that makes times good. Good times are almost bound to bring a wave of optimism with them. On the other hand, when the decline comes, it comes not because anyone loses confidence, but because the basic economic forces are changing. ( V. Lewis Bassie, “Recent Development in Short-Term Forecasting,” Studies in Income and Wealth, XVII [Princeton, N.J.: National Bureau of Economic Research, 1955], 10–12)

⁶⁵Joseph A. Schumpeter, The Theory of Economic Development (Cambridge: Harvard University Press, 1936), and idem, Business Cycles (New York: McGraw-Hill, 1939).

⁶⁶Warren and Pearson, as well as Dewey and Dakin, conceive of the business cycle as made up of superimposed, independent, periodic cycles from each field of production activity. See George F. Warren and Frank A. Pearson, Prices (New York: John Wiley and Sons, 1933); E.R. Dewey and E.F. Dakin, Cycles: The Science of Prediction (New York: Holt, 1949).

⁶⁷On the tendency to neglect the consumer's role in innovation, cf. Ernst W. Swanson, “The Economic Stagnation Thesis, Once More,” The Southern Economic Journal, January, 1956, pp. 287–304.

⁶⁸S.S. Kuznets, “Schumpeter's Business Cycles,” American Economic Review, June, 1940, pp. 262–63; and Richard V. Clemence and Francis S. Doody, The Schumpeterian System (Cambridge: Addison-Wesley Press, 1950), pp. 52 ff.

⁶⁹In so far as innovation is a regularized business procedure of research and development, rents from innovations will accrue to the research and development workers in firms, rather than to entrepreneurial profits. Cf. Carolyn Shaw Solo, “Innovation in the Capitalist Process: A Critique of the Schumpeterian Theory,” Quarterly Journal of Economics, August, 1951, pp. 417–28.

⁷⁰Some Keynesians account for investment by the “acceleration principle” (see below). The Hansen “stagnation” thesis—that investment is determined by population growth, the rate of technological improvement, etc.—seems happily to be a thing of the past.

⁷¹See Lindahl, “On Keynes’ Economic System—Part I,” p. 169 n. Lindahl shows the difficulties of mixing an ex post income line with ex ante consumption and spending, as the Keynesians do. Lindahl also shows that the expenditure and income lines coincide if the divergence between expected and realized income affects income and not stocks. Yet it cannot affect stocks, for, contrary to Keynesian assertion, there is no such thing as hoarding or any other unexpected event leading to “unintended increase in inventories.” An increase in inventories is never unintended, since the seller has the alternative of selling the good at the market price. The fact that his inventory increases means that he has voluntarily invested in larger inventory, hoping for a future price rise.

⁷²Summing up disillusionment with the consumption function are two significant articles: Murray E. Polakoff, “Some Critical Observations on the Major Keynesian Building Blocks,” Southern Economic Journal, October, 1954, pp. 141–51; and Leo Fishman, “Consumer Expectations and the Consumption Function,” ibid., January, 1954, pp. 243–51.

⁷³Keynes, General Theory, pp. 89–112.

⁷⁴Ibid., pp. 109–10.

⁷⁵What is “fairly” supposed to mean? How can a theoretical law be based on “fair” stability? More stable than other functions? What are the grounds for this assumption, particularly as a law of human action? Ibid., pp. 89–96.

⁷⁶Actually, the form of the Keynesian function is generally “linear,” e.g., Consumption = .80 (Income) + 20. The form given in the text simplifies the exposition without, however, changing its essence.

⁷⁷Also see Hazlitt, Failure of the “New Economics,” pp. 135–55.

⁷⁸It is usually overlooked that this replacement pattern, necessary to the acceleration principle, could apply only to those firms or industries that had been growing in size rapidly and continuously.

⁷⁹See his brilliant critique of the acceleration principle in W.H. Hutt, Co-ordination and the Price System (unpublished, but available from the Foundation for Economic Education, Irvington-on-Hudson, N.Y., 1955), pp. 73–117.

⁸⁰Neglect of prices and price relations is at the core of a great many economic fallacies.

⁸¹See Mises, Human Action, pp. 581 f.; S.S. Kuznets, “Relations between Capital Goods and Finished Products in the Business Cycle” in Economic Essays in Honor of Wesley Clair Mitchell (New York: Columbia University Press, 1935), p. 228; and Hahn, Commonsense Economics, pp. 139–43.

⁸²See the excellent critique by Leland B. Yeager of the neostagnationist Keynesian versions of “growth economics” of Harrod and Domar, which make use of the acceleration principle. Yeager, “Some Questions on Growth Economics,” pp. 53–63.