Currently I'm reading extensively Roger Garrison's "Time and Money" in preparation for my upcoming Macroeconomics class (I'm sure all of you would agree its always best to argue against mainstream graphs with your own graphs). However, while I understand fully the sequence of events in the ABCT, I keep having trouble comprehending what constitutes a "higher order good" that entrepreneurs would invest in due to low interest rates from a "lower order good" that constitutes what consumers demand (and the subsequent tug of war with F.O.P). I believe my confusion (and hopefully others) can be best illustrated by a quote from Time and Money (p. 47)
The time dimension that makes an explicit appearance on the horizontal leg of the Hayekian triangle has a double interpretation. First, it can depict goods in process moving through time from the inception to the completion of the production process. Second, it can represent the separate stages of production, all of which exist in the present, each of which aims at consumption at different points in the future.
By the first bolded statement, I assume Garrison means the process of a good being constructed throughout time (such as the building of a new mall or the development of a new toothbrush), and by the second he means the stages of production (he lists examples such as mining, refining, and manufacturing being in the earlier stages, while distributing and retailing are in the later stages). In terms of the second interpretation (which Garrison says is easiest to best understand the business cycle), a boom into higher order goods would be in industries such as mining, refining, and manufacturing, due to their time discount (lower interest rates increase their value) and not distributing and retailing.The boom occurs in those stages because they are most far removed from consumption, as we all know.
However, (and this is where my confusion starts), if we were to use the first interpretation of the triangle, then it seems as though the areas where malinvestment can occur (once the "smokestack" industries of mining, refining, and manufacturing plants) is now different. By concentrating on the construction of a new mall in its rudimentary forms, which due to low interest rates now becomes heavily profitable, i get confused because some construction like this clearly belongs in the "retailing" aspect of the second interpretation. Same with the research and development behind a new toothbrush. Clearly these are very remote from the consumer, the mall will not be built for 5-10 years and the toothbrush is still in the drawing board with scientists working on it. But they are still projects in consumer goods industries, which are in the later stages (as opposed to the "smokestack" capital goods industries)
In short, if I'm understanding the two interpretations (please critique if I don't), which one is it? In the first interpretation, construction of a new mall and toothbrush R&D are temporally remote from the consumer, where in the second interpretation, their construction is clearly in the consumer goods industries of the later stages of production. This confusion over capital has frustrated me for the longest time. Sometimes my mind will wonder over what constitutes a higher order good and I always run into dead ends because interpretations seem to contradict each other.
My only solution to the problem is that a good, development of something, etc, etc is a higher order good and in the earlier stages of the Hayekian triangle subject to malinvestment when the time discount effect (when a lowering of the interest rate increases the profitability of the project) is greater than the derived demand of a good (when a decrease in consumption will reduce the profitability of a project).I understand that a higher order good can praxeologically be described as a capital good, or one which is indirectly serviceable to the economic actor (see Rothbards MES chapter 1 for his classification of goods into consumer goods and FOP), but when describing the business cycle more explanation is nessary because we are dealing with different goods in different stages of production.
Hopefully I'm articulating my points clearly (and the two interpretations correctly). What are your thoughts?
nirgrahamUK:r it might need to be sold so as to ultimately cause the radio producer to come to own consumer goods that will directly service him.
But that's exchange and not production. If the producer sells his radio for bread (which he wishes to consume) to a baker who wishes to use the radio for his own personal consumption (listen to the radio), then the radio is a consumer good. Producer goods are goods of the higher orders. The lowest order consists of consumer goods (finished products). So for example: 1000 tons of sugar is produced, and 500 tons goes to supermarkets and the other 500 tons goes to candy shops who are to use the sugar for candy production. In the first case, we have consumer goods, and in the latter case, we have producer goods. Your definition would have them both as producer goods.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Esuric:But that's exchange and not production.
Esuric: If the producer sells his radio for bread (which he wishes to consume) to a baker who wishes to use the radio for his own personal consumption (listen to the radio), then the radio is a consumer good.
in the particular context, it is only the bakers plans which allow the radio to be a consumer good, absent the baker or another to fill his shoes it would not be. the reason we commonly say 'radios are consumer goods' is we just assume that for the most part there are consumers out there who will soon enough come and demonstrate that they view it as a consumer good.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
nirgrahamUK:they are not exclusive categories, indeed all production is exchange....
Can you tell me where you read this because it sounds quite absurd. It's true to say that production presupposes exchange, but I don't see how exchange presupposes production (picking a fruit and exchanging it for dirt does not involve production at all).
Actio
There's lots of this, Rothbard too of course....
BlackNumero: Secondly, by "this mall", I mean how the given scenario (decrease in interest rate, decrease in consumption, decrease in profitability) puts its construction in the early/later stages. For all I know, despite decreases in consumption, malls with a lower interest rate could be more attractive investments. I'm just saying that given this particular good, in the structure of production, where it fits (on the view of an analyst). So my question is, if the low interest rate was artificially induced and consumption never decreased, would construction of this good constitute expansion in "overinvestment" (earlier) stages(and be a malinvestment), or expansion in "overconsumption"(later) stages?
Secondly, by "this mall", I mean how the given scenario (decrease in interest rate, decrease in consumption, decrease in profitability) puts its construction in the early/later stages. For all I know, despite decreases in consumption, malls with a lower interest rate could be more attractive investments. I'm just saying that given this particular good, in the structure of production, where it fits (on the view of an analyst). So my question is, if the low interest rate was artificially induced and consumption never decreased, would construction of this good constitute expansion in "overinvestment" (earlier) stages(and be a malinvestment), or expansion in "overconsumption"(later) stages?
From what I took away from Garrison's Power Point presentation, low interest rates would artificially increase BOTH consumption AND investment. People would consume more, because they would get less benefit from saving in a low interest rate environment, and it would simultaneously be cheaper for them to borrow to spend. So rather than decreasing, as would be the case in a normal environment were interest rates to increase, consumption would increase. Similarly, in that artificially induced environment, it would be cheaper for investors to finance projects, and those projects would also look more necessary or desirable for them because of the artificially propped up consumption levels.
My own personal take on it would be that the over investment / malinvestment would be the people building the malls and shopping centers because of the artificially low interest rates and the artificially high consumption levels at the time. People want to buy stuff and banks want to lend them money inexpensively. It makes economic sense in that environment to build more malls. Or it would if it weren't artificially induced and unsustainable.
To me, the over consumption would be the people hauling all the stuff home from the malls.
JeffB:From what I took away from Garrison's Power Point presentation, low interest rates would artificially increase BOTH consumption AND investment.
Well yes, an increase in consumption is what causes the recession. Also, reducing interest rates stimulates the demand for consumption credit, which further lessens the subsistence fund.
nirgrahamUK: if the good in question is a large store from which consumer goods can be purchased. this is relatively higher order than the consumer goods themselves and relatively lower order than the goods from which the mall was constructed. I say this having considered the degree of direct utility satisfaction..
if the good in question is a large store from which consumer goods can be purchased. this is relatively higher order than the consumer goods themselves and relatively lower order than the goods from which the mall was constructed. I say this having considered the degree of direct utility satisfaction..
I'm not denying this, I agree with it substantially. However, not all higher order goods (using this method) would be malinvestments. If every higher order, capital good, producer good, etc from direct consumption would be malinvestments (Overinvestments in the earlier stages) during artificially low interest rates, then in catalactics almost every good used to create the final good sold to the consumer would be malinvestments, and the theory would turn to mush. There has to be a dividing line, and thats where I say the D.D and T.D effects come into play. Just like in catalactics its convenient and permissible to categorize things as consumer's goods when praxeology would not, it seems for the business cycle its appropriate to distinguish goods too:
For the sake of reiterating to ensure correctness:
Decrease in consumption, decrease in interest rate, increase in profitability (The Time discount effect is greater than the Derived Demand effect)-higher order good, good subject to "overinvestment" expansion
Decrease in consumption, decrease in interest rate, decrease in profitability (The Derived Demand effect is greater than the Time Discount effect)-lower order good, subject to "overconsumption" expansion
Esuric: Lower interest rates make more roundabout methods of production possible or seem possible, and since remoter production methods are more profitable, they are undertaken. Lower interest rates also increases the profitability of long-term durable capital goods (malls, houses, for example). As the capital good depreciates, its future costs are deducted while it yields present goods (until it's completely depreciated--that is, when the last future good is turned into a present good).
Lower interest rates make more roundabout methods of production possible or seem possible, and since remoter production methods are more profitable, they are undertaken. Lower interest rates also increases the profitability of long-term durable capital goods (malls, houses, for example). As the capital good depreciates, its future costs are deducted while it yields present goods (until it's completely depreciated--that is, when the last future good is turned into a present good).
Yes, and technically a lower interest rate would increase the value of every good, even infinitesimally (At an extremely low interest rate (negative for example) people would take out loans for almost any consumer good), just like an increase in consumption infinitesimally increases the value of every good/stage in production. There just has to be a point that separates the earlier staged capital from the later staged capital.
Esuric: So for example: 1000 tons of sugar is produced, and 500 tons goes to supermarkets and the other 500 tons goes to candy shops who are to use the sugar for candy production. In the first case, we have consumer goods, and in the latter case, we have producer goods. Your definition would have them both as producer goods.
So for example: 1000 tons of sugar is produced, and 500 tons goes to supermarkets and the other 500 tons goes to candy shops who are to use the sugar for candy production. In the first case, we have consumer goods, and in the latter case, we have producer goods. Your definition would have them both as producer goods.
When analyzing it in terms of catalactics, the sugar sold for supermarkets are consumer goods, and the sugar sold to candy shops are producer goods. Praxeologically speaking however, they are both producers goods in the eyes of the businessmen because they are indirectly servicable. Even in the consumer's the sugar sold at grocery stores would be producers goods, because most likely the consumer will be using the sugar to create something else (a cake, which along with other F.O.P are used to produce the now final good to be "consumed") instead of directly opening the bag and eating it.
JeffB: From what I took away from Garrison's Power Point presentation, low interest rates would artificially increase BOTH consumption AND investment. People would consume more, because they would get less benefit from saving in a low interest rate environment, and it would simultaneously be cheaper for them to borrow to spend. So rather than decreasing, as would be the case in a normal environment were interest rates to increase, consumption would increase. Similarly, in that artificially induced environment, it would be cheaper for investors to finance projects, and those projects would also look more necessary or desirable for them because of the artificially propped up consumption levels.
Yes, lower rates increase consumption because at the current low interest price (supported by monetary injection), people would not find it profitable to save and loan money. I just didn't write it because I wanted to keep the focus on the investment project. The consumption isn't necessarily artificial (unless its in the case of consumer credit), because people are spending more out of their incomes on final consumption instead of saving and investing it. Thats the problem: the new time preferences are reflective of the current investment strategies of businessmen.
The Federal Reserve injects money into the system and lowers interest rates from 5% to 2%. There are less people who find it worthwhile to loan their money, and instead spend it on restaurants and shopping. More restaurants/shopping centers are built because of the derived demand effect (they are closer to final consumption) and not as much from the low interest rates. Because resources are directed to satisfying consumers now (making more food, restaurants, shopping goods, and retail stores) instead of consumers later (mines, refineries, new technology to better produce the capital goods that make the capital goods that make the consumer goods, resulting in more and better products), a tug of war between the two stages over F.O.P begins and the processes of boom/bust are in motion. (At least that's from my understanding of theory and expansion into overconsumption/overinvestment)
JeffB:My own personal take on it would be that the over investment / malinvestment would be the people building the malls and shopping centers because of the artificially low interest rates and the artificially high consumption levels at the time. People want to buy stuff and banks want to lend them money inexpensively. It makes economic sense in that environment to build more malls. Or it would if it weren't artificially induced and unsustainable. To me, the over consumption would be the people hauling all the stuff home from the malls.
The overconsumption aspect seems quite silly. Unless you mean the people are consuming more and more final goods, i.e stuff bought at the mall. In that case, depending on how long it takes to make retail stores/malls (and whether they are more influenced by desirable consumer demand or low interest rates) they would either be in the later stages or in the earlier stages and everything before it would be in the earlier stages.
BlackNumero: JeffB:From what I took away from Garrison's Power Point presentation, low interest rates would artificially increase BOTH consumption AND investment. People would consume more, because they would get less benefit from saving in a low interest rate environment, and it would simultaneously be cheaper for them to borrow to spend. So rather than decreasing, as would be the case in a normal environment were interest rates to increase, consumption would increase. Similarly, in that artificially induced environment, it would be cheaper for investors to finance projects, and those projects would also look more necessary or desirable for them because of the artificially propped up consumption levels.Yes, lower rates increase consumption because at the current low interest price (supported by monetary injection), people would not find it profitable to save and loan money. I just didn't write it because I wanted to keep the focus on the investment project. The consumption isn't necessarily artificial (unless its in the case of consumer credit), because people are spending more out of their incomes on final consumption instead of saving and investing it. Thats the problem: the new time preferences are reflective of the current investment strategies of businessmen.
JeffB:From what I took away from Garrison's Power Point presentation, low interest rates would artificially increase BOTH consumption AND investment. People would consume more, because they would get less benefit from saving in a low interest rate environment, and it would simultaneously be cheaper for them to borrow to spend. So rather than decreasing, as would be the case in a normal environment were interest rates to increase, consumption would increase. Similarly, in that artificially induced environment, it would be cheaper for investors to finance projects, and those projects would also look more necessary or desirable for them because of the artificially propped up consumption levels.
BlackNumero: JeffB:My own personal take on it would be that the over investment / malinvestment would be the people building the malls and shopping centers because of the artificially low interest rates and the artificially high consumption levels at the time. People want to buy stuff and banks want to lend them money inexpensively. It makes economic sense in that environment to build more malls. Or it would if it weren't artificially induced and unsustainable.To me, the over consumption would be the people hauling all the stuff home from the malls.The overconsumption aspect seems quite silly. Unless you mean the people are consuming more and more final goods, i.e stuff bought at the mall.
JeffB:My own personal take on it would be that the over investment / malinvestment would be the people building the malls and shopping centers because of the artificially low interest rates and the artificially high consumption levels at the time. People want to buy stuff and banks want to lend them money inexpensively. It makes economic sense in that environment to build more malls. Or it would if it weren't artificially induced and unsustainable.To me, the over consumption would be the people hauling all the stuff home from the malls.
BlackNumero:In that case, depending on how long it takes to make retail stores/malls (and whether they are more influenced by desirable consumer demand or low interest rates) they would either be in the later stages or in the earlier stages and everything before it would be in the earlier stages.
What I meant about consumption is that the bust comes when investors engaged in building long term projects realize that they were not profitable and abandon them. The "depression" results from F.O.P being shifted from the unprofitable earlier stages (the overinvestment) to the later stages, and the subsequent unemployment that results from factors being laid off from the "capital industries". The result is a shorter structure of production with the earlier stage's prices falling the most and the final stages (consumer goods industries) falling the least or even rising in price relative the earlier stages and the former structure of production (the higher interest rate and price spread across the production structure reveal this). The secondary effects of the depression, often mistaken by economists to be the actual depression, is the decease in consumer spending and deflation that results from either bank panic (loss of coinfidence) or from the once employed capital goods workers and investors spending less, resulting in less revenue for consumer goods industries, layoffs, decrease in consumption from all workers, etc etc (Downward price-wage spiral).
Now, at least from my understanding of how Austrian's characterize "consumer spending" (spending on non higher order consumer goods, again the ambiguity arises once more) is consumer credit will increase spending on the later stages, raise the interest rate for private investment, and shorten the length of the P.S because the credit is spent on final goods (increasing their relative value compared to earlier stages) and a decrease in profitability in the earlier stages. Once the bust comes off course, consumer credit will stop and then the consumer goods industries will suffer, but from my understanding of the ABCT the pure "depression" bust comes strictly from the capital markets, consumer goods industries hurt only from the secondary effects of depressions.