I am a relative neophyte to economics in general and the Austrian school in particular, so this might be a little basic.
I get how the Fed’s loose monetary policies create artificially low interest rates, which creates the illusion that consumers are saving and demonstrating a time preference for future goods. I understand how this incorrectly indicates to entrepreneurs that it is a good time to invest in expanding or diversifying for future production.
What I don’t get is how this keeps fooling entrepreneurs over the course of centuries. Wouldn’t there develop a subset of entrpreneurs who recognize this pattern, and would realize that people really are not saving at all? Wouldn’t these entrepreneurs rely on some other metric than interest rates (saving rates, maybe)? Wouldn’t these entrepreneurs therefore avoid the malinvestment pitfalls in boom and thus emerge from the inevitable bust stronger? Wouldn’t these successful entrepreneurs then rise to the top and set a new, better standard for business models?
An entrepreneur only knows that some projects cannot be seen to completion. Whether they are his…
Empirically, there may be an advantage to making new investments because you come along with better engineering knowledge of the industry. New machines, common difficulties, etc.
Even if entrepreneurs know that “Saving’s Rates” are declining, they still would engage in long term investments would require savings to purchase because they know consumers will dig themselves into debt in order to buy the products. In today’s (or yesteryear’s economy), no entrepreneur would think that the vast majority of consumers could save up enough money to buy a house in one lump sum (unless they were dealing with the extremely rich). No, they knew that they would take out a mortgage and pay off the debt in installments.
In terms of calculating the profitability of investment projects, the interest rate will always remain king. Without the interest rate, you can’t calculate the present value of projects. Because of time preference, an entrepreneur will always prefer the same amount of money in the present than in the future, and no businessman would invest $100 to receive $100 or less in the future (this doesn’t include psychic considerations). The entrepreneur will need some estimation to gauge the present value of the future return he expects to receive from the particular investment, and there is no better market data than the interest rate. Using the interest rate, an entrepreneur can see whether or not the present value of the expected return is great enough to induce investment.If the interest rate is 5%, and the return he estimates he’ll receive is 2%, than he (psychic considerations aside) not engage in the investment because he knows he can just earn 5% by putting his funds into a bank account.
This is easier said than done. Any entrepreneur (smart ones at least) knows that interest rates may rise or fall in the future, but by how much is up to his guess. The Business Cycle distorts this range and provokes the entrepreneur into making malinvestments. The entrepreneur might know that the Fed is creating a business cycle, but he does not know by how much/or when the boom will end. And especially if he is in fierce competition, he can’t take the loss by sitting out for “2-8” years.
This is easier said than done. Any entrepreneur (smart ones at least) knows that interest rates may rise or fall in the future, but by how much is up to his guess.