(This is a simplification of the ABCT, created to emphasize an aspect, that sometimes seems overlooked. Let me know how it brings the point across. Reposted from my blog.)People produce stuff. There are many different types of stuff, which are not freely interchangeable, but let's keep it simple, and call it stuff.So what is this stuff for? Why do we make it?First off, we want to consume some of the stuff. We have to eat something, we have to live somewhere and we want that life to be good. To that effect, we need a lot of stuff, from food to computers to read articles from Mises.org on - to cover all the essential needs.But to make all this stuff, you need to expend quite a lot effort - and a lot more stuff. The people making the stuff also need to be taken care of. To build those complicated things, you need parts and raw materials, you need factories and mines and all the infrastructure around, and you need shops and a lot more to get the stuff to the consumers. To maintain a certain structure of consumption, you need a massive structure of production - the difference between the visible part of the iceberg and what lies below. It needs to be built and then kept in shape. (I, Pencil is but one illustration of it.)All this effort and stuff needs to be expended just to stay in one place, without changing anything.But we don't like to stay in one place, we want to have a better life, make the world a better place, achieve more - or simply change our taste now and then.To do this, to change the structure of production, requires more effort and more stuff. It has to come from somewhere. And no matter how you turn it (using your own stuff, somebody lending you theirs, or giving you a gift), some people have to sacrifice part of their lifestyles, and effort and stuff have to be spent. We may be better off tomorrow - and we hope so - but today we will have to do with less.Assuming those investments work out, the production structure will be upgraded and produce more (better, different) stuff. That means you can enjoy it more in consumption, invest it to produce more, or do some of both. This is that famed "natural growth". And it takes time.If it comes to the business cycle, people mostly look at the bust - businesses crashing, unemployment, an overall slump in production and standards of living. The Austrian Business Cycle Theory explains this with the practice of Fractional Reserve Banking and the expansion of credit, the lowering of interest rates, which misinforms entrepreneurs into wrong investments lines. In the boom, we waste a lot of stuff on things we can't really afford yet.Some critics(1)(2) argue, that this cannot be the case, because if people are investing too much, shouldn't they also be forced to limit their consumption? A boom is characterized by an increase in investment AND consumption, after all.So what is wrong about the boom? What can be wrong about having more stuff?To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they a) miraculously have more stuff from somewhere, or b) they forgot somethingWhat is often overlooked, is the stuff needed to maintain the current structure of production. If more stuff is employed for other uses, less stuff will be used for maintenance. If that happens with, say, a building, it will take some time for the effects to manifest. It will appear dirty, gather dust and cobwebs, cracks will start appearing in the walls, but it may take years or decades till it becomes dangerous to live in and it finally collapses.It is even more complicated for the structure of production. In our advanced economies it is composed out of many industries, thousands of companies and an uncountable number of flows between them. It is very hard to identify the cracks, until a part of it breaks down.And that is what happens in the bust.
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Peter Sidor:To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they a) miraculously have more stuff from somewhere, or b) they forgot something
Nice I like this.
I like it, seems to be a good simplifiation, yet I think the essence of the structure of production is there.
Small suggestion on this part:
Peter Sidor:some people have to sacrifice part of their lifestyles, and effort and stuff have to be spent.
I think it should say "...and effort and stuff have to be invested".
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
Great work, Peter. The only part I disagree with significantly is the following:
"So what is wrong about the boom? What can be wrong about having more stuff? To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they a) miraculously have more stuff from somewhere, or b) they forgot somethingWhat is often overlooked, is the stuff needed to maintain the current structure of production. If more stuff is employed for other uses, less stuff will be used for maintenance. If that happens with, say, a building, it will take some time for the effects to manifest. It will appear dirty, gather dust and cobwebs, cracks will start appearing in the walls, but it may take years or decades till it becomes dangerous to live in and it finally collapses.It is even more complicated for the structure of production. In our advanced economies it is composed out of many industries, thousands of companies and an uncountable number of flows between them. It is very hard to identify the cracks, until a part of it breaks down."
"So what is wrong about the boom? What can be wrong about having more stuff?
To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they a) miraculously have more stuff from somewhere, or b) they forgot somethingWhat is often overlooked, is the stuff needed to maintain the current structure of production. If more stuff is employed for other uses, less stuff will be used for maintenance. If that happens with, say, a building, it will take some time for the effects to manifest. It will appear dirty, gather dust and cobwebs, cracks will start appearing in the walls, but it may take years or decades till it becomes dangerous to live in and it finally collapses.It is even more complicated for the structure of production. In our advanced economies it is composed out of many industries, thousands of companies and an uncountable number of flows between them. It is very hard to identify the cracks, until a part of it breaks down."
The problem isn't that the current structure of production doesn't get maintained. The problem is that much of it was replaced by new over-extended chains of production. It is the new projects that don't get seen to completion due to the paucity of resources, and thus squander capital.
See this comic and this essay I recently wrote on this.
btw, this is my favorite part of your piece:
To do this, to change the structure of production, requires more effort and more stuff. It has to come from somewhere. And no matter how you turn it (using your own stuff, somebody lending you theirs, or giving you a gift), some people have to sacrifice part of their lifestyles, and effort and stuff have to be spent. We may be better off tomorrow - and we hope so - but today we will have to do with less.
Thanks to chloe for the point, fixed! (Sadly can't fix the first post itself now.)
And special thanks belong to Lilburne. That was a part, that was unclear to me. I'm trying to rewrite it and maintain the flow, it doesn't work out yet, but let's see. Let's replace the following two paragraphs:
J. Grayson Lilburne: What is often overlooked, is the stuff needed to maintain the current structure of production. If more stuff is employed for other uses, less stuff will be used for maintenance. If that happens with, say, a building, it will take some time for the effects to manifest. It will appear dirty, gather dust and cobwebs, cracks will start appearing in the walls, but it may take years or decades till it becomes dangerous to live in and it finally collapses.It is even more complicated for the structure of production. In our advanced economies it is composed out of many industries, thousands of companies and an uncountable number of flows between them. It is very hard to identify the cracks, until a part of it breaks down."
What is often overlooked, is the stuff needed to maintain the current structure of production. If more stuff is employed for other uses, less stuff will be used for maintenance. If that happens with, say, a building, it will take some time for the effects to manifest. It will appear dirty, gather dust and cobwebs, cracks will start appearing in the walls, but it may take years or decades till it becomes dangerous to live in and it finally collapses.It is even more complicated for the structure of production. In our advanced economies it is composed out of many industries, thousands of companies and an uncountable number of flows between them. It is very hard to identify the cracks, until a part of it breaks down."
with:
What is often overlooked, is the existing structure of production the boom is supposed to run on. If it was a house, it would be like starting to build an additional story or five on it, moving more people to live inside and perhaps building a factory on the top of it... ignoring any structural supports and foundations. Since there isn't really more stuff around, the new projects can't be finished, or run effectively - at least not without affecting the existing functions of the house. And since much of the construction material is torn out of the existing structure, the house might just collapse one day and bury all those enthusiastic builders. A lot of stuff will be wasted. Worse yet, you will need more stuff and effort just to rebuild the original structure.
(Any way to make it better? Advice is welcome.)