I have been studying the ABCT for the past two months, and while most of the theory makes sense to me, there is one that puts me in doubt. As argued in the ABCT, an increase in the proportion of savings against consumption leads to the addition of new stages to the production structure. What I'm skeptical about is: when we assume increase in savings would necessarily cause more roundabout methods of production to be adopted, aren't we assuming that there are more roundabout techniques of production available? If so, shouldn't the validity of the ABCT be tested empirically rather than being asserted as an a-priori conclusion?
"when we assume increase in savings would necessarily cause more roundabout methods of production to be adopted, aren't we assuming that there are more roundabout techniques of production available?"
Yes, because this is a very realistic assumption. However, if this were not the case then we would either see a broadening of the production structure at the later stages of production, or if even this wasn't profitable we would see a precipitous fall in the rate of interest (the demand for loans would be vertical beyond that point because more revenue couldn't be received throughout the economy as a whole). Such a state of affairs is unlikely to ever occur
"If so, shouldn't the validity of the ABCT be tested empirically rather than being asserted as an a-priori conclusion?"
How?
This paper by Hulsmann may be of interest. http://www.guidohulsmann.com/pdf/Time_Preference_Investment_Expenditure.pdf
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
Prashanth,
In my humble opinion it is not only the ABCT or for that matter the Austrians that believe that savings lead to the addition of new stages to the production cycle.
I think everybody giving it some thought will agree that the way any business gets more efficient, more competitive, more profitable is by adding capital goods to the production cycle- which requires either the businessman himself to save up some capital to buy these or borrow from another lender. who saved up the capital himself.
It is not necessarily the argument that savings "CAUSE" more roundabout processes, rather savings or low interest rates provide "incentive" for businessmen to improve production. All businessmen want to improve production. There is no end to the advancement of technology and additional ways to improve production in any industry, the only limiting factor is lack of available funds at an affordable rate.. Hence it is safe to assume that should conditions become favorable, most businessmen will avail themselves of it. Those that don't become less competitive and die.
Lets say a group of businessmen decide to hire 1000 workers to dig the Panama Canal by hand. They can get 1000 workers to volunteer right away. (But the project might not be finished in their lifetime.)
So they decide to temporarily slow down the process by saving and adding additional steps, save up capital or borrow at low interest to put in an order for 1000 shovels (or start the shovel factory themselves) . It takes 30 days for the order to be filled and they start working.
Or they could use a larger amount of capital and order mechanical hand held jackhammers and finish the job in twenty years, or they could buy cranes and bulldozers and earth movers etc.and be done in two. You do not need empirical testing to know the majority of businessmen will choose the most efficient way they can afford (determined by available credit and the interest they have to pay)
Where the Austrians come in is, they use this universal argument to prove that savings are not bad for the economy like some Keynesians claim.
How would you test it empirically anyway? Compare efficient businessmen with inefficient ones?