Prices, and Production: Lecture III, Part V

Published Fri, Sep 4 2009 2:04 AM | laminustacitus

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.