So I've been reading a bunch of bob murphy's articles (as well as trudging through HA and various coursework) and he often refers to capital consumption, specifically during the boom bust phase. Does he mean capital consumption as in taking on more liabilities than assets? Or does he mean neglecting the capital goods to the point that they're ruined?
If it's the former then I can parse it out, but if it's the latter: what is it about a boom phase that would cause producers to neglect maintenance of capital goods?
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
I realize you began this by mentioning it was Murphy's articles that brought you to this question, but did you happen to catch these? He goes into it more specifically:
The Importance of Capital Theory
My Reply to Krugman on Austrian Business-Cycle Theory
Also, for more on ABCT, check out the link from my sig.
Those were actually the articles which prompted me to ask this.
So in the sushi scenario, do they stop repairing the nets and increase personnel in other functions because they've found something with a higher capacity for work? What makes the people abandon net and hull repair in the first place if they were doing it for good reason? Why don't the fishermen and rice farmers sacrifice some workers to maintaining the engine? The engine seems to have a high input/output ratio relative to the earlier method; it requires increased food gatherers and a new section of workers for a decreasingly efficient method, and the islanders know that the decreased effort in boat maintenance will have an effect. If they don't then why did they employ the repairmen in the first place?
Here's Murphy's response:
These are great questions. I think Tyler Cowen had similar problems with my sushi article. The real answer is that people in the real world don't stop, say, rotating the tires on their tractor trailers during a boom period. That would be too stupid. Instead, they come to expect that inputs into their business will be available on the same terms as before, and begin thinking they are making huge profits, so they increase their consumption. Then when the crisis hits, interest rates and other prices go skyrocketing, and the entrepreneurs realize they can't even maintain business as usual. They regret not having saved more in the past.
So I responded:
Hmm. I get the overall picture, but I'm not making the connection between the different pieces you're saying. When you say that they expect that inputs will be available on the same terms as before, and think they're making profits, that makes sense when I think in terms of increased money supply and malinvestment in ventures that only seem profitable because of artificially low interest rates. But how does that fit into the sushi story? I realize in that example you're really just trying to illustrate capital consumption and not trying to explain ABCT, but I guess I'm having the same issues as Cowen. It sounds like you are saying that the economy can consume more in the short term, but only through the neglect of current maintenance. I recognize you're saying the focus should be on the fact that people are forward looking, and end up consuming more because they think they are wealthier or are poised to make more profit than they really are, but that doesn't change the initial point ("no free lunch"). Why did the villagers change around their structure of production in the first place? Are we just assuming the motor takes more guys to operate? Is that it? They got distracted by the new equipment and rearranged production based around it, and just forgot about the necessity of maintenance of the boats? Almost like a disconnect between thinking the new motor would make them more productive and the understanding that boat and net maintenance was necessary? But the main problem I'm having is that you admit "capital consumption" during the unsustainable boom period doesn't necessarily need to show up in things like reduced spending on building maintenance, or neglecting to have the tires rotated...but at the same time the initial premise is that maintenance is neglected and the capital is therefore "consumed", and that this is what allows for the increased consumption (as well as (mal)investment). That doesn't jive to me. Is it just that spending on consumption and investment can increase without a necessary dip in maintenance spending because of increased money units coming into circulation? And slowly over time, maintenance spending may remain the same, but the actual maintenance received decreases due to the inflation, thus hiding the fact that resources have been diverted? That would make sense to me...but it would also suggest capital consumption can't adequately be explained using a non-monetary economy.
In his response to that one, he basically apologized again and said he was pretty swamped right now, and they're good questions but he would basically be writing the article he's working on.
So just keep your eyes peeled for that
I wrote an article that might help answer your question: For Civilization, It Is Mises or Bust.
So the investments made during the boom which, given the boom-style structure of production, were listed as assets. But then those investments, given the busted structure of production, must be listed as liabilities, and that is what he means by capital consumption?
Even if that's wrong, I did find the examples with the trap not making a suitable bow and bow not making a suitable spear to be helpful.