Prices, and Production: Lecture III, Part IV
The importance that the adjustments of
the price mechanism free of any external influences has in respect to
a prospering economy is highlighted when we investigate the results
of the “'natural' movement of prices” is disrupted by monetary
policies. These may take the form of either injections of new money
into circulation, or the withdrawal of a portion of the current
circulating quantity, and here, as prior, the results of two typical
cases shall be elucidated: a) the case of injected money being
utilized to purchase producers' goods, and b) the case of the
injected money being utilized to purchase consumers' goods.
As before, the analysis is begun with the supposition that an
additional amount of money is injected into the structure of
production via credits to producers that can only be spent purchasing
producers' goods.
If the injector desires to seek
borrowers for this additional quantity, then the rate of interest
must be suppressed below the equilibrium rate in order that the
employment of this sum, and just this sum, is profitable.
To complicate matters, borrowers will only be able to use their loans
to purchase producers' goods though if they are able to outbid those
who are currently utilizing them, but borrowers who plan on creating
a longer, more capital-intensive production-process will be given a
boost against those whose means of production were profitable at the
equilibrium rate. It must be understood that the alteration in the
interest-rate will also change the relative profitability of
different factors of production, and will give a relative advantage
towards more capital-intensive investments. Without a doubt, though,
the result of this increased bidding, and competition on the part of
entrepreneurs will result in a general rise in the prices of
producers' goods,
and this coupled by the low rate of interest will induce
entrepreneurs into spending a portion of what they once spent on
original means of production on intermediate products, or capital. As
companies buy parts of their products, which they once produced for
themselves before the rate of interest was reduced, from another
firm, they can employ the labor so dismissed in producing these parts
on a large-scale thanks to the aid of new capital. This will then
have the result of transitioning the structure of production into a
more capitalistic process, and will relinquish the necessary original
means of production, and nonspecific producers' goods for the newly
created stages. In the end, a reduced rate of interest will result in
a more capitalistic structure of production, and the transition to
one will probably be done without an increase in the resources at the
disposal of entrepreneurs resulting in them investing less in the
original means of production, and more on intermediate goods.
Unlike the scenarios where the entire
process is begun by voluntary savings on the part of consumers, the
investments necessary to bring about a more capitalistic structure of
production as a result of monetary injection will result in decreased
consumption being forced upon the consumers. This results from the
fact that, while in the case of voluntary savings the transition is a
result of the consumption preferences, and the application of
producers' goods to longer processes will be done without any
reduction in consumption, in the current case the investments are not
done as a reaction to any change in preferences, but due to the
availability of newly injected credit. Nevertheless, there will be a
time during which the transition-process will go about without a
reduction in consumption due to the fact that there will still be
consumers' goods being finished off in the roundabout structure of
production, but these goods will eventually be finished. Once the
final consumers' goods have been sold, a scarcity of consumers' goods
will then occur, and its price will then rise as a result since the
consumers still desire to continue their previous rate of
consumption.
Even though the consumers will, as a
result of the investments in the structure of production, be forced
into consuming at a lower rate than before that does not mean that
they will passively accept the decrease in consumption, and not
attempt to resist it. In fact, the real income of the consumers, as a
result of this, will be retrenched, and it is improbable that
consumers will acquiesce to this for they will most likely try to
fight their decreasing rate of consumption by spending more of their
total income on consumption. At the same time many entrepreneurs will
know that they are in command of, at least nominally, a greater
quantity of resources, and ergo a greater expected profit, and the
income of wage earners will be increasing as a result of the
increased amount of money in the hands of entrepreneurs; much of this
income will be spent on consumption thus pushing the prices of
consumers' goods ever higher. As the consumers are trying to regain
their prior level of consumption, the prices of consumers' goods will
rise relative to the prices of producers' goods, and this will point
towards a return to a shorter, less future-orientated process of
production if the increase in the demand for consumers' goods is not
compensated for by a proportional injection of money by new loans
granted to producers'. As long as there is further credit-expansion,
then entrepreneurs will not have much of an incentive to liquidate
much of their long-term investments aimed at satiating the demands of
a more roundabout structure of production; however, the process of
credit expansion cannot go on ad infinitum.
Once the banks cease to inject new
credit to producers then the absolute increase in the quantity of
money spent on consumers' goods will no longer be compensated by a
proportional increase in the demand for producers' goods. This will
result in an increased demand for consumers' goods that will be very
much similar to the second case above, and hence shall be discussed
along with the second case in the next liveblog entry.