Imagine a master builder. He has at his disposal the labor of many workers, as well as a collection of bricks, shingles, panes of glass, and so on. Mises then asks us to suppose that the subordinate in charge of counting the available supply of bricks inflates the number by 10 percent. Thus the master builder draws up the blueprint for the house, erroneously thinking he has more bricks to work with than he really does. Because of this error, he embarks on a building plan that is unsustainable; there are not enough bricks to finish the house as it is designed on the blueprint.
Now obviously, the sooner the builder learns of the mistake, the better. If he finds out immediately after the excavators have dug the hole for the foundation, the waste will consist merely of the extra labor and gasoline needed to use the earth movers to put back some of the dirt and make the hole smaller.
But suppose the builder doesn't find out until after he has already laid the foundation and erected the frame of the whole house.
I've just been re-reading Mises' brief analogy relating to building, and noticed an article by Bob Murphy that puts it to great use. In an open letter to Gary Becker he uses the building analogy to explain how capital theory is crucial to understanding why Austrian's deem recessions to be inevitable and necessary responses to artificial credit expansion. Highly recommended.
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