I think I understand pretty clearly the distortion created by credit or money creation that flows into various consumer goods markets. I have found frank Shostak's explanations including examples of shoes and bread and the real pool of funding very helpful in this regard. My confusion develops when it comes to the new money flowing into producer goods: When I am discussing this with people I run into trouble when I mention that if the newly created money goes into making tools it could well go towards producing the wrong tools, this is all I've got. The answer I get is "how do you know? Won't more and better tools make for cheaper consumer goods in the future, (what ever goods these are doesn't seem to matte to them) in general, they add, won't the standard of living be better because certain things will now be more cheaply made for the future marketplace?" Who am I to say that these cheaper producer goods won't be contributing to a future raised standard of living?
I guess I am looking for a clear, concise thought experiment to debunk this in a satisfying manner. I would also love any good reading recomendations.
I feel sad when someone is asking for replies and get nothing.
Moreover the increase one might expect to observe in the prices of the factors of production (capital goods, labor and natural resources) as a result of the greater demand for them in the fifth stage does not necessarily occur (with the possible exception of very specific means of production). In fact each increase in the demand for productive resources in the stages furthest from consumption is mostly or even completely neutralized or offset by a parallel increase in the supply of these inputs which takes place as they are gradually freed from the stages closest to consumption, where entrepreneurs are incurring considerable accounting losses and are consequently obliged to restrict their investment expenditure on these factors.
The answer I get is "how do you know? Won't more and better tools make for cheaper consumer goods in the future, (what ever goods these are doesn't seem to matte to them) in general, they add, won't the standard of living be better because certain things will now be more cheaply made for the future marketplace?"
The answer I get is "how do you know?
The problem, of course, is that there aren't enough real resources available to finish those investments. In other words, you know that a malinvestment is a malinvetsment, ex post, because it cannot be completed at all or on time (or will be completed at the expense of a more warranted investment). Credit expansion makes it seem as if more resources are available for investment (simulates an expansion in the supply of real loanable funds, i.e., a higher savings rate) when they really aren't.
You get giant, unfinished skyscrapers, railroads, housing developments, etc (these are just some historical examples).
[EDIT] Also, the issue that xahrx raises, namely that capital is complementary and heterogeneous, is key.
"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."
Thank you so much. This really clearifies it for me. Do you have a particular article or chapter that you could suggest to me for further reading?
Again I recommend Huerta de Soto's book. See especially, pages 272-282, 285-291, 300-301, 316, 324, 326-327, 329-332, 336, 345, 349, 352 (footnote 68), 357, 363-369 (and footnote 77), 371-373, 398, 401-405, 409, 414 (including footnote 14), 422, 434-435, 441-442, 446-452, 462, 500-502.