In the ABCT printed money ends up stimulating the economy and increases AD. So in the Austrian view of the economy AD can be increased by govt. that means that Austrians are kinda like Keynesians, in how they view the economy right? Also do Austrians believe in rational expectations, and the efficient financial market hypothesis?
It's not really that inflation increases AD so much as that it distorts the shape of AD. With this said Austrian Economics doesn't really recognize a singular AD curve because it doesn't accept the idea of really "one" economy, more an integrated process. We can look at total outlays, but looking at this in terms of a simple graph is misleading. With this said there's a lot more overlay between Austrian and Keynesian economics than one might think. I've argued before that Austrian economic analysis differes only because of two key concerns (knowledge and price stickiness).
Rational expectations has some validity, while EMH utterly confuses the market system itself, it's nonsense. The whole point of AE is that the economy is endlessly changing and people have different feelings about the future and that these factors lead to a tentative equilibrium point, all knowledge is not magically displayed in prices instantaneously
Could you go through the math, or the model, you have in mind? I'm trying to better visualize what you have in mind (regarding the relationship between consumption and interest).
Maybe the answer is in the chapter but I think that MES chapter 6 section 4 page 398 (PDF page 463) is the source of my confusion. I really don't understand how, unless we expect a mass increase in consumption in the future, that there can be more investment now than in the future, especially in the ERE.
Here the ratio is 100:318 favoring investment. I really need to read through the chapter more thoroughly (working to that point with my re-reading of the book) but here it seems like he's saying that that this is the aggregate consumption/investment ratio throughout the economy. This might change here if he's talking about an individual firm, but even if he is the fact is that in the ERE the cyclical changes should mean that everything is the same in each time period. Thusly if 318 is invested, at interest, then how is it recooperated if only 100 is consumed? It would seem like investment would have to be less than consumption, so for instance if consumption is 100 and the interest rate is 2 percent then investment could not rise above roughly 98, because otherwise the money needed to recoup the investment cannot be raised.
This would appear to be the case even if we're talking about a firm and not an aggregated economy model... Insights anyone?
@ the above
The 318 "investment" does not seem intuitively profitable because you are comparing the payoff from one period to the cost of an investment that pays out more than once.* Remember that the savings are invested in multiple stages of production, some that will not mature in to consumer goods for a long time. Only in a world where only one stage of production is possible would it be impossible to profitably invest more than the discounted value of consumer spending.
*An example: Say I expect to recieve 100 USD one year from now and 100 USD two years from now. The interest rate is 2%. I can invest 194** profitably despite my yearly "income" being less than this.
**( 100 / 1,02 ) + ( 100 / 1,02^2 )
1. But doesn't this reject the assumptions of the evenly rotating economy? In the ERE shouldn't each time period be identical in terms of both investment and consumption? For instance if you invested 194 in one time period, wouldn't you then need to invest 194 in the next time period and so on? This is obviously unsustainable since each time period you would still only be receiving 100 in investment?
2. In the dynamic economy wouldn't this require precipitous changes in aggregate investment between each time period? For instance if 194 is invested in this time period with the expectation that it would be paid in two years, then what can happen during the next year? Wouldn't investment have to fall to 0 in the next year? Even if we altered this to a payoff over several years, the problem still become evident in that investment from year to year would need to change dramatically. It works a little bit better from the viewpoint of a single firm's point of view because then investment can just go to another firm and so on, but it wouldn't seem to work for the whole economy.
I haven't really got a good answer to the questions above when it comes to the theoretical production model which you originally asked about, but regarding my simplified example of personal saving, I would need to save 96 every year after the initial year if I wished to maintain my personal "production structure" of "100 USD each year for the next two years". This would be easily accomplished due to also recieving 100 USD every year.
I am not sure how that relates to the production structure, or if it does at all. Especially confusing is trying to figure out what "gross investment" means in my simplified example versus what it means in the theoretical model of the production structure.
The thought that first comes to mind is that part of the saving each year comes from the money spent on consumption in previous years that has travelled up the stages of production. In any specific year, only the consumer good industry has its costs covered by sales of consumer goods. The stages above this one have their costs covered by sales of capital goods which are paid for by the savings done from their higher-order stage customers which they have earned from past sales of consumer goods.
Not really a very good answer, but I just wanted to get it out there. In any case, I would really recommend De Soto's book on banking and trade cycles, which I am also reading right now, but have not really grasped well enough to be very good at explaining it. He gives a very thorough explanation of the production structure model in chapter 5.
Ok, this is extremely nerdy and probably uninteresting for the majority of people even on an economics forum, but I discovered something curious about Gross Investment when recreating the production structure in De Soto's book:
Gross Investment in year "0" represents precisely the discounted future cash flows that can be attributed to the productive capabilities of the capital goods paid for by Gross Investment that year.
Note however that the future cash flows are not just (the price of consumer goods) x (number of periods the presently available capital goods last). You must also deduct the land/labor required in the future periods that it takes to advance each of those goods further down the production stages. Here is my calculation or "proof"* if anyone is interested:
https://docs.google.com/file/d/0B_rHbEboAyLQc0hFSzFmMVRCZE0/edit
*it's not really a proof in the strict sense as it doesn't use symbols, but I don't see why it shouldn't hold for other values
There is no such thing as Agreggate Demand, as there is no such thing as a "price level" or a meaningful measure of "real output". You can aggregate individual demand schedules for a single good into a market demand schedule for that good. But there is no meaningful way of aggregating demand schedules for multiple goods into a single demand schedule.