BlackNumero, your question concerns thymology and the challenge of applying economic theory so as to understand some concrete episode of history. you should not expect economic theory itself to have all that much to say about how you should apply your understanding of it, and your understanding of the people of the world, their values, and their plans.
If you are simply concerned about discussing ABCT with other people, do it like this, you make the economic theoretic statements. you ask who you are talking to what they consider to be goods of higher and lower orders, and you can use these peoples own examples to put bones on the theory for them. then you shouldnt have the problem of them saying that you have ordered the goods incorrectly from their p.o.v…
my own thymology, understanding of values, and plans and the like. would classify malls as higher order, rather than lower order, (like things that can be bought in malls). but this is only my perspective.
The question of whether something is higher or lower order is one as to the degree of indirectness of its supplying utility. there is a wide scope of agreement, even though this is a subjective concept. so you can’t be completely objectively scientific about concrete and precise pronouncements of ‘applied’ ABCT knowledge. but most people wont need you to be. they can fill in the blanks. they can understand indirect utility and higher and lower order. there is large scope for agreement
Firstly, I’m not necessarily talking about malls, I’m talking about this mall, or any other good that I could put in this problem. (I put mall down as an example, and it relates more to the modern economy and how we are much more consumer/service oriented). 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?
I understand what you mean as a solution to use my own theoretic statements. I could easily talk to someone, take their examples, and make a scenario based on “toothbrushes” and “Oil refiners”. However, what allows people to understand things much more better is when you put things in context of events, such as the last crises. People want to learn to understand human events. In taking our last boom/bust, lets say I describe the crises with the examples of Overinvestment in housing, green technologies, and oil exploration and Overconsumption in clothes, restaurants, food, “my” malls, and retail stores. In the context of the past 10-12 years, am I right or wrong?
OK, my mistake. I was thinking of our current fairyland situation, where the Fed can lower interest rates with a wave of their magic wand, creating the “necessary” additional money out of thin air.
The ordering of goods is looked at from the process of production–that is, its role in turning inputs into finished goods. The finished radio sold on the market is a consumer good.
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..
Yeah, If it’s no longer used in the production process then it can’t be considered a producer good. Also, I don’t see how a radio could be used in the production process.
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).
it might need to be installed within another product… or 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. selling something is engaging in the production of what one receives for having sold. to make this point I will emphasise that a good that you own is serviceable to you in a way that a good that you do not own isn’t (or we could talk about its distance from you, its location, and the transport necessary to bring it to you as an act of production, I believe Mises himself did this)
Rothbard talks about transforming food on the plate to food in your mouth as an act of production.
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.
they are not exclusive categories, indeed all production is exchange…
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.
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).
Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one. We call such a willfully induced alteration an exchange.
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.
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.
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
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.
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.
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)
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.
But I think that consumer credit etc. does most definitely play into the equation here. Garrison did in fact show that on one of his slides when he showed that the artificially low interest rates pushed BOTH investment and consumption beyond the “Possible Production Curve(?)” (sorry if I messed that name up, I don’t have time to look it up. That, of course, is what makes it unsustainable. It is beyond what is possible given the available resources, at least on a sustainable basis.
If people can refinance and get a lower rate on their mortgage, it is like free money to them. In our recent boom days, many were using their homes as a virtual ATM machine. It was particularly potent, because the lower rates also drove up the values of the homes, allowing many to tap into that extra equity that now showed up on their balance sheets. Some of that extra money was spent on final consumption, of course.
Yes. That is what I mean. I think that was definitely the case, and I think the malls were hit particularly hard in the bust end of this cycle. In fact, many malls are in bankruptcy or financial difficulty around the country.
It would seem to me that they could be influenced by either or more likely, both the increased demand and the less expensive capital to expand. But I’m not quite sure what you mean by the earlier stages and later stages. As I see it, they would figure that sales are going way up and calculate that they could make more profits if they expanded, especially if they could secure a loan on favorable terms. The malinvestment part would come in when the bust cycle hits and the sales drop off dramatically, just as the bank begins pulling in on the amounts they are willing to lend &/or the interest rates they will charge.
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.
