Prices, and Production: Lecture III, Part V
It is now time to move from a case
where credits are given to producers to where consumers are being
given credits. Indeed, the general effects of an increase of money
via consumers' credits, which will result in an increased relative
demand for consumers' goods compared to producers' ones, results in
the inverse of the previous scenario where there is an increase
through producers' credits. The sudden injection of money into the
economy done by the purchasing of consumers' goods will result in
entrepreneurs investing in shorter processes of production in order
to take advantage of the large profit margins to be obtained in the
markets for consumers' goods.
Obviously, once consumers have been
given consumer-credits they will then proceed to purchase a greater
quantity of consumers' goods than prior, but the structure of
production at the time, having been created for a vastly lower
consumer-demand, cannot produce enough to satiate consumer-demand.
Due to the fact that there is now a large discrepancy between supply,
and demand, the rise in consumer prices will be considerable, and
this will result in greater profit-margins to be obtained from later
stages of production compared to stages closer to the original means
of production. The resulting prices, only the result of the scarcity
of consumers' goods, will have the effect that production will shrink
to fewer stages than will be necessary after those goods have reached
equilibrium price once the scarcity has been alleviated.
While the structure of production is
being altered to fit a more present-orientated economy, original
factors, and the more mobile producers' goods will be in high demand,
and, as a result, the longer production-processes will become less
profitable – strengthening the trend towards shorter ones.
Producers' goods of a more specific character created for the prior
state of equilibrium will fall in price as their complementary
nonspecific goods are reinvested in shorter processes; ergo, the
production of those producers' goods will cease. In addition, though
capital in the later stages of production is generally of a highly
specific character, entrepreneurs may very well employ original
factors in order to the consumers' goods that have yet to be
finished. Nevertheless, the fall in the prices of intermediate
products with be across the board, and entrepreneurs will hence stop
work in the earlier stages of production once they realize their
unprofitability.
However, the capital utilized in the
longer processes of production cannot instantly be assimilated into
the longer ones; rather, the process will be gradual. In order to
employ the capital in the shorter processes, it must begin at the
beginning as the product progresses toward consumption, and the
available producers' goods are implemented in the process. The
production of goods does not happen in an instant; instead, it is a
process that, in a capitalistic structure of production, occurs over
the course of years, and intermediate goods are created for a
specific process of production. Hence, entrepreneurs just cannot add
new capital to structures of production where the intermediate goods
from the preceding stage are goods of a specific character designed
for the capital existent in the following stages; rather, one must
begin from the original factors of production, and proceed with a new
process of production. Furthermore, the form of the end process will
be further retarded by the uncertainty that entrepreneurs face as to
what methods will be profitable once the scarcity of consumers'
goods, and the resulting scarcity-level prices have been alleviated.
As Hayek notes: “It seems something
of a paradox that the self-same goods whose scarcity has been the
cause of the crisis would become unsaleable as a consequence of the
same crisis.” The high demand for consumers' goods has diminished
the supply of nonspecific producers' goods necessary to finish the
reallocation of producers' goods in the structure of production. The
crux of the matter lies in the fact that the specific producers'
goods necessary for a structure that employs the quantity of capital
at hand have not been produced. Here, we find a fundamental economic
fact that mankind so often neglects: capitalistic production can
continue only so long as man is content with consuming that goods
that part of our wealth, which the structure of production has
produced for consumption. Any increase in the quantity of consumption
requires saving beforehand if it is not to disrupt current
production, and if the increase in production is to be maintained
continuously, then the amount of intermediate goods must be increased
proportionately in all stages. “The impression that the already
existing capital structure would enable us to increase production
almost indefinitely is a deception.”
Overall, the increased demand for
consumers' goods resulting from an injection of money into the
economy via consumer-credits will result in a scarcity of
consumer-goods, and, to satiated demand, there will be a resulting
shortening of the structure of production toward a more present,
consumption orientated economy.