Savannah Liston:and I was wondering why the costs start going up
Higher time preference which means that consumers are consuming now rather then later and since there is a finite supply of resources, costs go up as a sign of weaning resources.
'Men do not change, they unmask themselves' - Germaine de Stael
But the consumer goods are coming from capital goods, right? That's another thing that I am confused about, maybe I don't understand the relationship between capital goods and consumer goods, but if there's a demand for consumer goods, doesn't that affect the capital goods industry as well because you need capital goods to produce consumer goods? And what defines a capital good and consumer good?
Costs don't go up in the capital goods industry because of the higher wages paid?
Savannah Liston:But the consumer goods are coming from capital goods, right? That's another thing that I am confused about, maybe I don't understand the relationship between capital goods and consumer goods, but if there's a demand for consumer goods, doesn't that affect the capital goods industry as well because you need capital goods to produce consumer goods? And what defines a capital good and consumer good?
You're entirely correct. In the long run a shift in time preference towards the future will mean that more consumer goods are produced due to the greater productivity of capital goods. But, in the short run, when the shift in preferences occurs there will be a temporary reduction in the flow of consumer goods. Now, this is fully justified due to the lower time preference.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Savannah Liston:But the consumer goods are coming from capital goods, right?
Depends, there is high order capital which takes time to empower.
Savannah Liston:maybe I don't understand the relationship between capital goods and consumer goods, but if there's a demand for consumer goods,
A capital good is something that produces consumer goods or is apart of consumer goods production. Think of it like a donut machine. That is what a capital good is, while a donut itself is a consumer good.
Savannah Liston:Costs don't go up in the capital goods industry because of the higher wages paid?
If time preference goes up and all things being equal, costs and prices go up.
Profits don't decrease in the consumers goods industry, in fact, rising profits in the consumer goods industry is what can cause the boom to end.
Essentially what's happening is that the lower interest rates and excess credit are going to the capital goods industries. They're going to use this money to bid for the factors of production, in particular labour. What's important to keep in mind is that the workers haven't changed their discount rate (if they had changed in corresponding to the increase in credit, the business cycle wouldn't happen). Now, with the lower interest rates and money they're receiving, they're going to be buying more consumer goods.
So what's happening is that the lower interest rates and excess credit is telling entrepreneurs to spend money investing in capital goods, at the same time, the increased spending on consumers goods is telling other entrepreneurs to spend their money producing consumer goods. Of course, this means that both sets of entrepeneurs are going to bidding for labour, causing the prices to increase. In the long run, only the producers of consumer goods will be warranted in expanding production and these people will make profits. As profits are made in these sectors, the producers of capital goods will shift towards the production of consumer goods and the bust will occur.
"In the long run a shift in time preference towards the future will mean that more consumer goods are produced due to the greater productivity of capital goods. But, in the short run, when the shift in preferences occurs there will be a temporary reduction in the flow of consumer goods. Now, this is fully justified due to the lower time preference."
So if people demand consumer goods, don't capital goods have to be produced in order to create consumer goods? Don't consumer goods come from capital goods?
If consumer goods come from capital goods like donuts come from donut machines, then why wouldn't the capital goods industry increase and make money as the consumer industry makes money from the higher wages being spent by the workers in the capital goods industry.
And are we assuming that the workers will spend their higher wages in the consumer good industry, and not reinvest it into the capital goods industry?
I feel like I need to know this subject inside out, and answer all objections for myself because this is an issue I am constantly having to debate with friends, and I don't think I understand this entirely yet.
"In the long run, only the producers of consumer goods will be warranted in expanding production and these people will make profits. As profits are made in these sectors, the producers of capital goods will shift towards the production of consumer goods and the bust will occur."
Why will only the consumer goods industry be warranted in expanding production?
And why will the capital goods industry not make profits over the long run?
While time preference is high, so is the cost of borrowing; capital purchases are delayed and made with larger down payments.
maybe take a time out and read this:-
http://mises.org/humanaction/chap20sec6.asp
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
But the Fed has increased the money supply and made it cheaper to borrow money...is that what you're talking about?
I still don't see how that answers my questions.
And to clarify, I totally agree with the Austrian theory of economics, I just need to know the in's and out's of it, so to speak, because I know people are going to ask me these questions, and I need to have the answers, or they'll never respect my opinion, much less be persuaded by it.
nirgrahamUK: maybe take a time out and read this:- http://mises.org/humanaction/chap20sec6.asp
Thanks, I'll take a look at it. I started Human Action, I don't think I got that far though.
Its the relevant chapter for you :-)