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The structure of production reconsidered – Jörg Guido Hülsmann

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Rodolphe Topffer posted on Sat, Jul 21 2012 5:36 AM

 

The Cambridge Capital Controversy (CCC) is sometimes cited as one of the strongest refutation of the Austrian Business Cycle Theory, considered by Mark Blaug as “the final nail in the coffin of the Austrian theory of capital”.

We must first point out that the “reswitching controversy” is empirically refuted. From Zonghie Han and Bertram Schefold (2005) :

 

 
    This paper examines the empirical relevance of the capital controversy. The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation. In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function. This paper presents empirical examples for the first time. Thiry-two input-output tables from the OECD database serve as data. As a result, one envelope is found which involves reswitching. Reverse substitution of labour or reverse capital deepening are observed in about 3.65% of tested cases: they involve at least two switchpoints.

Theoretically, Guido Hülsmann, in “The structure of production reconsidered”, (if you are very familiar with the fundamentals of the ABCT, just start reading from page 13 "Two Critical Annotations") had investigated the issue. He explains that the interest rate and the production structure are not necessarily negatively related (i.e., a lower interest rate is related to a lenghtening of the structure of production) even though the interest rate still affects relative spending, as theorized by austrians. Because the ABCT was too restrictive, he proposes to develop and enrich the theory of the structure of production. He lists 8 possible scenarios, each of them having different implications. He finally investigates the implication of the consumer credit and the variation of monetary conditions. The former simultaneously thins and lengthens the structure of production. The latter has no systematic impact on the structure of production.

Interestingly, the scenarios implying a drop of the PRI also involve higher relative spending toward the upstream stages. The eight scenarios can be summarized as follows :

Scenario 1° : increase of savings at a constant demand for savings, lower PRI, increase in gross savings rate, lenghtening of the structure of production, monetary revenues fall, real revenue of savers-investors increases, real revenue of owners of original factors increases more strongly.

Scenario 2° : increase of savings and of demand for savings, constant PRI, strong increase in gross savings rate, lenghtening of the structure of production, monetary revenues fall, real revenue of owners of original factors increases, real revenue of savers-investors increases more strongly.

Scenario 3° : increase of savings at a constant demand for savings, strong decrease of the PRI, increase in gross savings rate, no lengthening of the structure of production, activity shifts from stages of production downstream to stages of production upstream, monetary revenues fall, real revenue remains constant for savers-investors while increasing for owners of original factors.

Scenario 4° : increase of the demand for savings with no increase in savings, higher PRI and gross savings rate, lengthening of the structure of production with a thinning of the higher stages (with exception of stages newly created), monetary revenues fall, real revenue increases for savers-investors while remaining constant for owners of original factors.

Scenario 5° : decrease of savings with increase in demand for savings, higher PRI, constant gross savings rate, lengthening of the structure of production, relative spending diminishes toward the upstream (with exception of stages newly created), monetary revenues remain constant, real revenue increases for savers-investors while diminishing for owners of original factors.

Scenario 6° : increase of savings with decrease in demand for savings, lower PRI, constant gross savings rate, shortening of the structure of production, relative spending increases toward the upstream (with the exception of the stages that disappear), monetary revenues remain constant, real revenue diminishes for savers-investors while increasing for owners of original factors.

Scenario 7° : decrease of the demand for savings at a constant supply of present goods, lower PRI and gross savings rate, shortening of the structure of production, widening of the higher stages (with the exception of the stages that disappear), monetary revenues increase, real revenue increases for savers-investors while remaining constant for owners of original factors.

Scenario 8° : decrease of savings at a constant demand for savings, higher PRI and a lower gross savings rate, lengthening of the structure of production with a thinning of the higher stages (with exception of stages newly created), monetary revenues increase, real revenue remains constant for savers-investors while decreasing for owners of original factors.

Scenarios 1°, 2°, 3° and 4° entail higher growth, 5° and 6° have no impact on growth, 7° and 8° entail lower growth.

 

Capital-Based Growth: Basic Mechanisms

[...] (1) A change of relative spending between upstream and downstream stages may result from the mere lengthening of the structure of production – that is, even if the PRI does not change. The creation of additional stages upstream ipso facto changes relative spending within the structure of production. The new stages create producer goods that make human labour in the downstream stages more productive. The lengthening therefore tends to entail growth.

(2) There can also be a change of relative spending within the time structure of production that results from the decrease of the interest rate. If the PRI drops, there is a simultaneous widening of the upstream stages resulting from greater expenditure, and a thinning of the downstream stages resulting from decreased expenditure. Even if the overall length of the structure of production did not increase, the relative widening of the upstream stages would have a similar effect as the previously discussed lengthening. It would attract more labour and capital upstream, thereby increasing the output of producer goods that make human labour in the downstream stages more productive. Hence, a relative widening of the structure of production, too, tends to entail growth even if the overall length of the structure of production does not increase.

(3) Finally, increases of the gross savings rate, even if they do not affect relative spending between the different stages, increase investment spending and therefore increase the revenues of employed as compared to unemployed factors of production. They therefore create incentives for the owners of hitherto unemployed factors to sell respectively rent them out on the market. In short, increases of the gross savings rate tend to make more factors of production available, thereby increasing the total physical output of the economy.

[...] Sometimes the mechanisms work in opposite directions. For example, a drop of the demand for present goods entails a lower PRI and a lower gross savings rate than would otherwise have occurred. The lower PRI then increases relative spending in some of the upstream stages and on that account entails growth, whereas the drop of gross savings reduces factor revenues and therefore factor employment.

Scenarios of Growth and Distribution

Growth Scenario I

Let us start our analysis with the scenario conventional Austrian scenario of savings-based growth. It is characterised by an increase of the gross savings rate at a constant demand for present goods. This entails a drop of the PRI and also a lengthening of the structure of production. Hence, this scenario has the unique feature of positively combining all three basic growth mechanisms. It is therefore the strongest possible growth scenario. [...]

How does this scenario affect monetary and real revenues in the new final equilibrium? What can be said about its impact on the final distribution of revenues? The general tendency of monetary revenues is to fall, because the vigorous growth occurs at constant monetary conditions, thus entailing a significant drop of the price level (growth deflation). This fall will be most moderate in the case of the owners of non-specific factors such as labour and energy resources (coal, gas, etc.). Their monetary revenues will tend to equal their discounted marginal value product (DMVP), which is roughly speaking equal to the arithmetic product of their marginal physical product (MPP) and the price of this physical product, divided by the interest rate. 16 In the present scenario, the MPP increases whereas the interest rate falls. On that account, therefore, the DMVP of factors of production tends to increase. However, the falling price level entails an opposite tendency, so that on that account the DMVP of factors tends to diminish. Again, the overall result depends on the particular situation of each factor. Some non-specific factors might end up earning higher monetary revenues, while others will earn less than before. The general tendency is for a slight decrease because of the strong drop of the price level.

The owners of specific factors of production used in the upstream stages might even end up earning higher monetary revenues. This depends on the extent of the increase of the savings rate. In Figure 22, we see that, in the new equilibrium, monetary spending is higher in some of the upstream stages than before, and that it creates entirely new incomes in the additional stages created most upstream. However, consider the following variant of Growth Scenario I, in which the gross savings rate drops so much so that it diminishes spending in all but the new stages:

In this case it is likely – though not necessarily the case – that all factors except for the specific factors used in the new stages will earn lower monetary incomes than before.

What about savers-investors? Their interest incomes are subject to two opposite forces. On the one hand, they save and invest more and on that account obtain more interest payments. On the other hand, the interest rate drops and on that account they earn lower interest payments. The overall result depends on the particular circumstances of each case. We therefore have to say that the present scenario does not have any systematic implications for the monetary revenues of savers-investors.

Now let us turn to the new final distribution of real revenues. From the outset it is clear that the latter will strongly increase in the aggregate, because total monetary spending remains constant whereas the price level plunges. For savers-investors this implies that their real revenues will tend to increase. As we have seen, their monetary revenues will not be systematically affected, and thus the drop of the price level entails a tendency for their real interest revenue to increase. The increase of real revenues is even more clear-cut in the case of the owners of original factors. Indeed, their real revenue tends to be equal to their marginal physical product (which strongly increases) divided by the interest rate (which declines).

Growth Scenario II

Our second growth scenario is characterised by a simultaneous increase of the gross savings rate and of the demand for present goods. These changes have no systematic impact on the PRI, and thus there is no relative change of spending on that account. However, the gross savings rate is substantially higher in the new structure, which is therefore much more physically productive on that account. Moreover, the new structure is much lengthier, because with a PRI that is by and large unchanging, the greater volume of savings can only be invested upstream. Thus there are two growth mechanisms at work, and the third growth mechanism is neutral. We estimate that this is the 2nd most growth-friendly variation of the time market and the production structure.

As far as monetary revenues are concerned, the general tendency is for them to fall, again because the growth deflation. What we have said in Scenario I concerning the monetary income of the owners of original factors of production applies in the present scenario by and large as well. (The only difference concerns the fact that in Scenario II spending drops in all stages, except for the new stages that are being created upstream.) One would have to expect that wages and rents remain stable or diminish slightly. By contrast, the monetary income of savers-investors will significantly increase, because the PRI does not change whereas the volume of savings strongly increases.

Real revenues will strongly increase in the aggregate. For savers-investors this implies that their real revenues will strongly increase. The owners of original factors, too, will experience a significant increase of their real incomes, for the same reasons we have spelled out in discussing Scenario I.

The present scenario is only slightly behind the first one in its positive implications for growth. (We have to keep in mind that it involves a much stronger increase of the gross savings rate than in Scenario I.) The main difference between the first two scenarios concerns their impact on the distribution of revenues. Scenario I is more favourable for income derived from original-factor ownership than for income derived from saving-investment – though both types of income increase in real terms – whereas in the present scenario it is the other way round.

Growth Scenario III

Our third growth scenario is a variant of the first one. Like the latter, it is characterised by an increase of the gross savings rate at a constant demand for present goods, and by a drop of the PRI. However, this time there occurs no lengthening of the structure of production, because the drop of the PRI overcompensates the increase of the gross savings rate. … Consider again our above numerical example. Compare the initial spending stream (Table 2) with the spending stream that we considered as a counterexample (Table 4):

159―138―120―104―90
158―154―151―148

Figure 25 gives a graphical illustration of the corresponding changes on the time market and within the production structure.

[...] The old structure is lengthier, and on that account it is more physically productive than the new one. However, in the new one, spending in the second and third stages (as compared to the consumer-goods stage) is relatively higher than in the first structure. In this case too, therefore, more activity will be shifted from the consumer-good industries to stages of production upstream, and on that account, the new structure is more physically productive than the first one. Finally, the gross savings rate is marginally higher in the new structure, which is therefore more physically productive on that account too. We estimate that this is the 3rd most growth-friendly variation of the time market and the production structure.

The impact of this scenario on the distribution of monetary and real revenues is analogous to the first one. The level of monetary revenues will tend to be higher than in Scenario I because growth is less intense and there is therefore less pressure on prices. However, because the tendency for the economy to grow is less clear-cut than in the first scenario, the level of real revenues will also tend to be less elevated. [...]

The most striking feature of the present scenario is its similarity to the first one. In both case, the initial causal change is an increase of the supply of present goods (savings) on the time market. But depending on the demand for present goods (the “price-elasticity” of demand), the repercussions on the time structure of production and the impact on growth are very different. The bottom-line is that a plummeting PRI, when resulting from an inelastic demand for savings, does not necessarily make for vigorous growth.

Growth Scenario IV

We have just seen that one and the same initial change of inter-temporal values, reflected in an increase of savings at a constant demand for savings, can give rise to two very different growth scenarios. Similarly, the following growth scenario is one out of two that spring from the same initial change, namely from an increase of the demand for present goods at a constant supply of present goods. On the time market, this implies a new final equilibrium at a higher PRI and a higher gross savings rate. The structure of production lengthens, but at the same time it thins out at the higher stages, with the only exception of the new stages that are being created upstream (Figure 26).

The new structure becomes increasingly thinner toward the upstream, except for the very highest stages, and on that account is less physically productive than the [old] one. However, the new structure is also lengthier and on that account more physically productive than the old one. Last but not least, the gross savings rate is higher in the new structure, which is therefore more physically productive on that account too. We estimate that this variation of the time market and the production structure is on a par with Scenario III and falls therefore within the 3rd highest growth rank. As in Scenario III, there are here two growth mechanisms at work: the lengthening of the structure of production, and the increase of the gross savings rate; and as in Scenario III, one of the growth mechanisms is deteriorating.

The striking difference between the present scenario and Scenario II is that, in the latter case, the PRI drops, whereas here it increases. However, we hold that this difference has a systematic impact, not on growth, but on distribution only.

As far as monetary revenues are concerned, the general tendency is for them to fall because the growth deflation. The monetary income of the owners of original factors of production will have a clear tendency to fall (a) because spending drops in all stages, except for the new stages that are being created upstream; and (b) because a rising PRI means that the marginal value product of the original factors will be discounted more than before. By distinct contrast, the monetary income of savers-investors will significantly increase, because both the PRI and the volume of savings strongly increase. Scenario IV therefore implies a significant reshuffling of the relative weight of income sources. Income from factor ownership will significantly decrease relative to income from saving-investment.

Real revenues will increase in the aggregate. For savers-investors this implies that their real revenues will very strongly increase. For the owners of original factors, the situation is more ambiguous because the increase of interest rates implies a stronger discount of their marginal physical product, which could completely offset the expected increase of that marginal physical product.

The present scenario is ranked on the same level of growth friendliness as Scenario III. The essential difference between these two scenarios concerns their impact on the relative weight of income types. Scenario III is more favourable for income derived from original-factor ownership than for income derived from saving-investment, whereas in the present scenario it is the other way round.

Growth Scenario V

The third growth scenario is characterised by a decrease of the supply schedule and a simultaneous increase of the demand schedule on the time market.

These changes have no systematic impact on the gross savings rate. The PRI is substantially higher in the new structure, which implies a lengthening of the structure of production. The latter therefore becomes more physically productive on that account. However, the same circumstance also exercises an adverse effect, as relative spending diminishes toward the upstream, with the only exception of the new stages. In Scenario V, only the lengthening of the structure of production is here favourable for growth, whereas the gross savings rate stays put, and the relative spending (except for the new stages upstream) deteriorates as far as the prospects for growth are concerned. We rank this scenario below all other scenarios that we have so far considered (4th rank). Indeed, it has no systematic tendency to entail economic growth. It will have this consequence only accidentally, namely, if the advantage of the lengthening more than offsets the disadvantage of the deteriorating relative spending.

As far as monetary revenues are concerned, the general tendency is for them to remain stable, because of the lacking growth dynamics (no growth deflation) and because consumer spending remains stable too. However, the strong rise of the PRI will have a significant impact on the relative weight of the different income classes. The monetary income of the owners of original factors of production will fall because a rising PRI means that the marginal value product of the original factors will be discounted more than before. By distinct contrast, the monetary income of savers-investors will increase, because the PRI [increases] while the volume of savings stays put.

Real revenues will by and large remain stable in the aggregate. The real income of savers-investors will increase. The income from original factor ownership will diminish, because the increase of interest rates implies a stronger discount of their marginal physical product, while there is no significant increase – if any – of the marginal physical product itself.

Growth Scenario VI

The sixth scenario is the exact opposite of Scenario V. It is characterised by an increase of the supply schedule and a simultaneous decrease of the demand schedule on the time market. Thus we can illustrate it with the above Figure 27, which only needs to be read backwards, with the red demand and supply schedules representing the initial situation, and the dark schedules representing the new final equilibrium.

As in Scenario V, the changes we are considering now have no systematic impact on the gross savings rate. The PRI is now substantially lower in the new structure, implying a shortening of the structure of production, which therefore becomes less physically productive on that account. However, the drop of the PRI also tends to promote relative spending upstream, with the exception of the stages that disappear. In Scenario VI, only the reshuffling of relative spending toward the upstream (except for the stages that disappear) is favourable for growth, whereas the gross savings rate stays put, and the structure of production shortens. It therefore has no systematic tendency to entail economic growth. We therefore rank it in category 4.

The impact of Scenario VI on monetary and real revenues is exactly analogous to the one of Scenario V. Thus its distributional consequences are the exact inverse of those that we found in that former scenario. [...]

Growth Scenario VII

Scenario VII is the exact opposite of the above Scenario IV. It is characterised by a decrease of the demand for present goods at a constant supply of present goods. On the time market, this implies a new final equilibrium at a lower PRI and a lower gross savings rate. The structure of production shortens, but at the same time it becomes wider in the higher stages, with the exception of the stages that disappear. We can illustrate Scenario VII with the above Figure 26, which only needs to be read backwards, with the red demand and supply schedules representing the initial situation, and the dark schedules representing the new final equilibrium.

As the new structure becomes increasingly wider toward the upstream, except for the highest stages, it is on that account more physically productive than the new old. However, the new structure is also shorter and its gross savings rate is lower. Thus, Scenario VII features only one basic mechanism promoting growth, whereas the other two basic mechanisms entail the opposite tendency. It therefore seems to be barely justified to speak of a “growth” scenario at all. However, we cannot exclude on purely theoretical grounds that the one positive mechanism overcompensates the two others. This has to be determined empirically for each individual setting. In any case, this is the least probable of all growth scenarios that we have considered. We therefore rank it in a 5th category.

The impact of Scenario VII on monetary and real revenues is exactly analogous to the one of Scenario IV. Thus its distributional consequences are the exact inverse of those that we found in that former scenario. [...]

Growth Scenario VIII

Our last scenario is the exact opposite of the above Scenario III. It is characterised by a decrease of the supply of present goods at a constant and inelastic demand schedule, resulting in a lengthening of the structure of production. On the time market, this implies a new final equilibrium at a higher PRI and a lower gross savings rate. The structure of production lengthens, but at the same time it becomes thinner in the higher stages, with the exception of the new stages. We can illustrate Scenario VIII with the above Figure 25, which needs to be read backwards, with the red demand and supply schedules representing the initial situation, and the dark schedules representing the new final equilibrium.

Just as in the preceding case of Scenario VII, the present growth scenario features only one basic mechanism promoting growth, whereas the other two basic mechanisms entail the opposite tendency. We therefore rank it in the same 5th category in which we have classed Scenario VII.

The impact of Scenario VII on monetary and real revenues is exactly analogous to the one of Scenario III. Thus its distributional consequences are the exact inverse of those that we found in that former scenario. [...]

We shall now turn to consider two complications, by dropping previous assumptions, namely (1) the assumption that the economy operates without consumer credit and (2) the assumption that monetary conditions remain stable.

As can be seen, the distinction between the widening of the structure of production (SoP) and the lenghtening is of crucial importance As discussed in the section "Capital-Based Growth: Basic Mechanisms" a widening of the SoP without a lenghtening of the SoP has the same effect as a widening of the SoP combined with a lenghtening of the SoP. I highly recommend to read the paper (starting from page 13). I hope someone would try to discuss the topic. Because this issue is often ignored by the austrians, as Hülsmann pointed out : 

 

One, there was without any doubt a certain intellectual laziness. The basic “universal” relation between time preference and the investment horizon intuitively makes sense and finds, within the context of a monetary economy, a ready confirmation in the standard savings-based growth scenario that more or less monopolised the attention of Austrian economists. As a consequence, until very recently nobody had a closer critical look.
I also recommend this two papers, by Renaud Fillieule.
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Some thoughts.

 

It should ne noted that a decline of the PRI, even without a lengthening the structure of production can still lead to speculative bubbles and malinvestment. It only requires that spending to be higher in the stages of production further from consumption, not in the stages closest to consumption.
 
Scenarios 1, 3, 6 and 7 fit this pattern. But recall that there is no impact on growth in scenario 6 and lower growth in scenario 7. It seems to me that the bubbles grow to enormous proportions, certainly through monetary overexpansion, but also because the economic growth is strong. For "euphoria" to be manifested, everything must increase at the same time, which is possible only if the new money is continually injected into the system (see Fritz Machlup cited in Money, Bank Credit and Economic Cycles, page 462). Without monetary overexpansion, a rise in some prices implies a fall in other prices, all other things being equal. If malinvestments occur, given the fact that scenario 7 implies a less vigorous growth, malinvestments are likely to have less serious impact on the economy (compared to 1929 and 2008, for instance). In addition, scenario 7 does not involve an increased supply of present goods; this poses a theoretical problem because any monetary overexpansion necessarily implies an increase (though illusionary) in the supply of present goods, through a lowering of interest rates. Scenarios 6 and 7 therefore do not contradict the fundamentals of the ABCT.
 
In scenarios involving an increase of the PRI, we have consistently the same pattern. A lengthening of the structure of production and a thinning of the stages of production further from consumption, the latter necessarily implies that expenditures in stages further from consumption do not increase. In this case, malinvestments cannot arise.
 
The scenario n°2 shows a curious pattern. The PRI does not drop, but the structure of production lengthens. At first glance, one might think that malinvestment can take place. Given the fact that ABCT hypothesized that "artificially low interest rates through monetary overexpansion will trigger malinvestments" the core of the ABCT seems to be weakened. I think, however, that we can reformulate the theory as follows : "monetary overexpansion will trigger malinvestments" (whether the interest rate drops or remains constant).
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Jargon replied on Sat, Jul 28 2012 2:52 PM

Thanks Rodolphe,

This is a good read, though I'll have to do it over again. As for your very last point, I think that's how Mises phrased it in Human Action, as an overexpansion of credit in general rather than specifically a drop in the interest rate, which Hayek made the foundation of the theory I believe.

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The rate of interest wasn't necessarily central to Hayek's theory.  See his response to Sraffa's critique of Prices and Production; also, his later work supports this interpretation, since he emphasizes a distinction between the rate of interest and the rate of profit.

 

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Thanks OP. That blog has a lot of great information on economics, race, and IQ.

 

http://menghusblog.wordpress.com/

 

I'm going to have to look through it for a while. 

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Wheylous replied on Sun, Jul 29 2012 10:27 AM

Without reading any of the OP, I think that his post had nothing to do with race and IQ.

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Rudolphe,

When you say the ABCT ought to be re-described as:

"monetary overexpansion will trigger malinvestments" (whether the interest rate drops or remains constant)

do you mean monetary expansion in general (the FED in NYC prints more cash and starts spending it around NYC and then filters around everywhere) or do you mean over expansion in the banking system?

The atoms tell the atoms so, for I never was or will but atoms forevermore be.

Yours sincerely,

Physiocrat

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Physiocrat,

"do you mean monetary expansion in general (the FED in NYC prints more cash and starts spending it around NYC and then filters around everywhere) or do you mean over expansion in the banking system?"

 

I would mean, obviously, "over expansion" and not "expansion". I do not believe that fractional reserve was the fundamental cause of business cycles, especially after reading "The Theory of Free Banking" (by George selgin). See especially chapter 5. If the new money is created in response to any change of the public demand for inside money, the economy will not experience a boom. However, the Fed as well as banking regulation (legal tender, or suspension of specie) is responsible for such monetary disequilibrium. As Selgin explained it in his book, over expansion should not occur in a free banking system. I know however that Hülsmann, de Soto, and other Rothbardians would disagree.
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Thanks for posting this.  Material is somewhat dense, but should be worth the read . . . if I find the time . . .

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Jargon replied on Mon, Sep 10 2012 4:34 PM

Rodolphe,

Are you sure that Rothbard and his ilk disagree that free market fractional reserve banking would not result in systematic monetary overexpansion? One of the big points elaborated on in Human Action was the mechanism by which free banking would necessarily curb the inflationary activity of banking, if all banks issued their own currencies and none was favored legally over the other. I had understood that Rothbard's opposition to free banking was that it was somehow fraudulent activity. I would think that given Rothbard's personal dedication he would have read the section of Human Action to which I am referring, which lays out quite clearly the impossibility of systematic inflation under banking sans state privilege.

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I remember clearly what Huerta de Soto has said about the interest rate in his book : 

... the generation of loans ex nihilo (i.e., in the absence of an increase in saving) raises the supply of credit to the economy ... This lowering of the interest rate in the credit market does not necessarily manifest itself as a decrease in absolute terms. ... the reduction is even compatible with an increase in the interest rate in nominal terms, if the rate climbs less than it would have in an environment without credit expansion (for instance, if credit expansion coincides with a generalized drop in the purchasing power of money).
But at that time I have not realized that this argument could be served against CCC, which states that interest rate is not necessarily associated with the length of the structure of production.
 
Also, I note that Rothbard precisely made the same point in Man, Economy and State (see page 1003) :
Credit expansion always generates the business cycle process, even when other tendencies cloak its workings. Thus, many people believe that all is well if prices do not rise or if the actually recorded interest rate does not fall. But prices may well not rise because of some counteracting force — such as an increase in the supply of goods or a rise in the demand for money. But this does not mean that the boom-depression cycle fails to occur. The essential processes of the boom — distorted interest rates, malinvestments, bankruptcies, etc. — continue unchecked. This is one of the reasons why those who approach business cycles from a statistical point of view and try in that way to arrive at a theory are in hopeless error. Any historical-statistical fact is a complex resultant of many causal influences and cannot be used as a simple element with which to construct a causal theory. The point is that credit expansion raises prices beyond what they would have been in the free market and thereby creates the business cycle. Similarly, credit expansion does not necessarily lower the interest rate below the rate previously recorded; it lowers the rate below what it would have been in the free market and thus creates distortion and malinvestment.
Jargon,
 
I read "What has Government done to our money" a while ago, in French. In the english version (see page 43-44), the corresponding passage to which I'm referring should be :
Issue of pseudo-receipts, like counterfeiting of coin, is an example of inflation, which will be studied further below. Inflation may be defined as any increase in the economy’s supply of money not consisting of an increase in the stock of the money metal. Fractional reserve banks, therefore, are inherently inflationary institutions.
This is, of course, surprising (you could also read The Case for a 100 Percent Gold Dollar). If I remember correctly, He said that the Suffolk Bank illustrates the success of private supply of money with FRB (see pages 115-122 of A History of Money and Banking in the United States).

 

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Bob Murphy really put it best: http://mises.org/daily/1148

 

His response to the Cambridge Controversy I would boil down to: So what? 

 

To look at it another way, all Böhm-Bawerk is really saying is this: If you give the entrepreneur more time to produce a given output, he can generally do it with fewer inputs of labor and raw materials. Or we could put it this way: If you give the entrepreneur the same amount of labor and raw materials, he can produce a greater output the more time he is given to work with.

As far as I can tell this is really of no significant importance. In a world where people only had choices that lined exatly the way required for rewitching to occur this might be of importance, but how often does this come up? For the vast majority of time the standard model applies. It's like the idea of a backwards bending labor supply curve, even if true, of how much importance is it likely to be? It would probably occur at pay rates that few people ever make. 

 

I see this as an issue of sub-par intelligence. If they were sufficiently intelligent they would have applied this to reality and seen that it's really of no significant importance.

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I think I could agree with RP Murphy, but I just wanted to focuse on the interest rate, because it is commonly said by non-austrians that what really matters is the rate of interest rather than the additional profits which would have never existed in the absence of monetary over expansion.

And this is the reason why we should not place much faith in empirical works. I'm not saying that empirical works are somewhat useless, though.

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