Economics Questions

Re: ABCT producer goods and stimulus

Rodolphe Topffer — Thu, 27 Sep 2012 23:33:31 GMT

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.

See also footnote 90, p 380-381, footnote 89 p 378-379, footnote 5 p 402, footnote 16 p 415-416, footnote 21 p 420-421, footnote 34 p 435-436. I think that's enough.

Re: ABCT producer goods and stimulus

Ethan — Thu, 27 Sep 2012 00:20:59 GMT

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?

Re: ABCT producer goods and stimulus

Esuric — Wed, 26 Sep 2012 21:15:33 GMT

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.

Re: ABCT producer goods and stimulus

xahrx — Wed, 26 Sep 2012 21:09:35 GMT

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?"

Tools are more and more specific. If the stimulus makes a tennis ball factory seem profitable, you can't just magically transform the machinery to make tennis balls into machines that make iPhones. Captial is not homogenous, it is heterogenous, and so it can't be 'applied' or 'transfered' to other uses without taking a loss to varying degrees, depending on how specific its purpose may be. More 'stuff' in general is only an improvement to our standard of living to the extent people actually want that stuff. If you're tooled up to produce tennis balls and no one wants to play tennis, what good have you done? Profit is making what people want, in the amounts they want it, at the time they want it delivered. Tooling your factories for the wrong goods in the wrong amounts to be delivered at the wrong time is inherrently bad for improving people's standard of living.

The mistake the argument you outline makes is that it assumes supply creates demand when it doesn't, at least not in that fashion. Demand dictates what should be supplied, and the injection of new money and credit skews the economy away from producing what the aggregate of people are actually demanding toward what the people who receive the new money and credit are demanding. It essentially gives those people a sustained buying advantage at all stages of production all the way down to the people in those industries who see that new money in their paychecks soonest. So basically that's how the wealth transfer of inflation happens; those people nearest to the money/credit injection, whether they're investors or consumers, get to exercise their buying decisions in the market with an artificial advantage, basically making the economy produce what they want at a level higher than otherwise would be sustainable.

Re: ABCT producer goods and stimulus

Rodolphe Topffer — Wed, 26 Sep 2012 19:06:55 GMT

I feel sad when someone is asking for replies and get nothing.

A book I highly recommend is Money, Bank Credit, and Economic Cycles. See especially, chapter 5 & 6. (or this)

To be honest, if I understand the question here "if the newly created money goes into making tools it could well go towards producing the wrong tools" your interlocutor doubts that monetary overexpansion would necessarily lead to malinvestment. The problem is that a lengthening of the production structure could only be sustainable with savings, not cheap money. The relative prices of consumer goods must fall in order to keep the production structure sustainable, a lengthening of the production structure should be accompanied with a narrowing of the stages closest to consumption, because resources (including workers) are reallocated toward the stages furthest from consumption. Although the narrowing of the stages of production close to consumption is followed by a reduction in the supply of consumer goods, prices do not rise precisely because of the reduced demand for consumer goods due to the rise in savings. In the words of de Soto :

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.

See also the Ricardo Effect, pages 329-332, 345 in his book. Now, with cheap money, everything seems to increase at the same time. In fact, when loans exceed savings, we have a deficit in the financing of future consumption, while entrepreneurs increasingly invest in factors of production. Consumers demand credit for present consumption; this means that in the near future, they will consume less in order to pay off their debts. But given the surge in present demand for goods, entrepreneurs tend to invest more than they would do otherwise, because they (wrongly) expect an increase in future demand.

ABCT producer goods and stimulus

Ethan — Mon, 24 Sep 2012 05:06:34 GMT

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.