Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Question about Murphy article on idle resources

rated by 0 users
This post has 4 Replies | 2 Followers

Top 10 Contributor
Male
Posts 4,987
Points 89,745
Wheylous Posted: Thu, Nov 1 2012 11:36 AM

I wrote to Murphy to ask him the question. What are your thoughts on it?

 

I have a question about a Mises Daily article of yours, specifically, this one:

http://mises.org/daily/3290/Does-Depression-Economics-Change-the-Rules

At one point, you say

"The restaurant owner isn't going to make a long-term investment based on the business of bridge workers, since they will be out of work once the bridge is finished."

However, when later discussing the Friedman analogy to shirts sitting idle in a mall, you say

"Every problem with the tongue-in-cheek suggestion regarding dress shirts is (more or less) applicable to unemployed workers. In particular, government shirt buying would lead to too many new shirts being produced, just as government "green jobs" programs will induce workers to quit other lines and go into solar-panel production."

Isn't this contradictory? The restaurant owners are the smart guys and don't make changes to their plans but the producers of clothing and solar panels are silly and adjust production to the temporary government stimulus.

Thanks!

  • | Post Points: 20
Top 200 Contributor
Male
Posts 432
Points 6,830
Groucho replied on Thu, Nov 1 2012 11:55 AM

I'll have to read the article for a little more context. But off-hand I'd say that restaurants generally involve short-term production (ordering food a few days in advance), whereas textiles involve several months of production efforts that are forecast based on prior season or year sales.

A restuarant-owner is also more hands-on in terms of knowing his clientelle compared to the buyers and executives in retail clothing who rely more on sales trend analysis.

An idealist is one who, on noticing that roses smell better than a cabbage, concludes that it will also make better soup. -H.L. Mencken
  • | Post Points: 35
Top 10 Contributor
Male
Posts 4,987
Points 89,745
Wheylous replied on Thu, Nov 1 2012 12:01 PM

That's my explanation, but I'm not sure I'm 100% convinced.

  • | Post Points: 20
Top 200 Contributor
Male
Posts 432
Points 6,830
Groucho replied on Thu, Nov 1 2012 12:29 PM

Now that I've read it, I think Murphy's point with with the shirts had to do with "idle resources" (the inventory of shirts sitting on shelves, unused) and that government purchases would prevent them from reaching market-clearing prices (coming from that business, I can tell you that markdown dollars form a huge part of the forecasting calculations)

If the restaurant were already producing too much food and the bridge-workers were fortuitously on-hand to buy up all the excess, then the two scenarios would be equivalant and the government interference probably would cause the owner to make more severe malinvestment decisions along the same lines as the shirt-seller. A "food bubble" if you will. cheeky

But with solar panels, the factors of production are so immense and are geared to a certain output, they can't simply be turned off like a spigot when the demand becomes rare or non-existent.

An idealist is one who, on noticing that roses smell better than a cabbage, concludes that it will also make better soup. -H.L. Mencken
  • | Post Points: 5
Not Ranked
Male
Posts 87
Points 1,215
Albert replied on Thu, Nov 1 2012 1:10 PM

Yes I agree with Groucho but even further:

Regardless of who's stupid and who is smart, all people respond to incentives.

It is not true to say the restauranteur would not do anything. While the bridge laborers are taxing his staff and providing temporary profit, he might add more part time staff, stay open longer and increase the short term inventory of raw materials. He can easily scale that back again when the boom is over.

He just wont add any expensive long term investments in buildings or pancake machines. It would take too long to pay off those obligations and or he might lose his own money..

Also the shirt seller who gets rescued by the government  and solar panel manufacturer responds to incentives. They are not dependent on satisfying a customer. For them the customer has become the State. This provides all sorts of perks not available to the restaurant owner.

The government might (usually does) provide interest free money or at least puts pressure on a supposed private bank to make the loan. The state also guarantees repayment, so the banker has no need to scrutinize the ability of the manufacturer to repay. The state might also promise to buy X number of units and/or assist in selling X number of units in China by using their influence, putting it in treaties, manipulating currencies, providing tariffs on competitors etc. So a smart (non free market) businessman can do calculations too. He has no downside risk, he does not need to have a lot of skin in the game. He stands to make $XXX for as long as his buddy stays in power and then he can try to bribe the next president and if it fails, just walk away. Boom ends bust starts.

Assuming that the proverbial shirt seller was a free marketer to begin with he might change his mind and become a crony capitalist temporarily until the fountain runs dry, or see the state as just one big temporary customer that can be profited from for a year or two. It won't create as big a boom and bust as when the state takes over the whole shirt making industry but will still have bad effects.

But if the state takes over all shirt sellers, they will eventually control all shirt makers and then all the way back to cotton farmers- it will have a devastating effect. Regardless of whether the shirt seller was smart enough to see it coming or not.

 

 

  • | Post Points: 5
Page 1 of 1 (5 items) | RSS