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Suppose there is a change in the demand from chicken to beef. If entrepreneurs foresee this change before starting production in the next round, then the chicken makers will invest less and come out even. Beef makers will receive profits, because in the market, wages always chase profits, lagging behind them. Hence, an excess of profits over losses. Right?
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Mises’ argument about a progressing economy seems strange, even preposterous. “We call a progressing economy an economy in which the per capita quota of capital invested is increasing. … It is out of this additional wealth that the surplus of the total sum of entrepreneurial profits over the total sum of entrepreneurial losses flows.” (HA, 294-5) So, people create net savings, converting their consumption to investment. But profits are created precisely by consumer spending! A progressing economy constantly brings precisely losses to existing producers and redirects production from consumer goods to novel capital goods to be used in new and longer production processes. Thus, it seems that on the contrary, in a progressing economy, there is an excess of losses over profits. What’s going on?
Could it be that a progressing economy is defined as a conjunction of two conditions: (1) capital accumulation and (2) profitable use of that capital? A retrogressing economy then is one in which one or both of these conditions is false?
- Suppose there is a change in the demand from chicken to beef. If entrepreneurs foresee this change before starting production in the next round, then the chicken makers will invest less and come out even. Beef makers will receive profits, because in the market, wages always chase profits, lagging behind them. Hence, an excess of profits over losses. Right?
The chicken industry’s capital stock remains the same or somewhat retracts. The Beef’s capital stock expands. The net overall capital stock has increased. Partly due to new savings and investment in the Beef industry and partly due to a consumer driven preference. However this is a very shallow way of looking at an economy. It does not easily explain the role of savings and profits.
So, people create net savings, converting their consumption to investment. But profits are created precisely by consumer spending! A progressing economy constantly brings precisely losses to existing producers and redirects production from consumer goods to novel capital goods to be used in new and longer production processes. Thus, it seems that on the contrary, in a progressing economy, there is an excess of losses over profits. What’s going on?
In industry accounting profits and interest are made in various ways. Especially in industries higher up in the structure of production. Not all industries get their accounting profits from consumer spending.
A) Consumer thriftyness frees up resources to be invested elsewhere(Making them cheaper for industry to employ).
B)There will exist market incentives to increase the capital stock of industries more distant from consumer consumption during a period of general consumer thriftyness.
As consumers curtail their consumption it becomes more attractive to invest further into the capital stock of industries furthest away from consumption. These industries are least impacted by sudden consumer changes in preferences.
excess of losses over profits.
Capital accumulation brings wealth. Capital consumption depletes it. If you have continual losses over profits economy wide you would have a shrinking and impoverishing economy.
Thats not likely to happen as long as there exists a free market. What your missing here is that there are stages lengthy to production. Different stages in industry are effected by consumer preference in different aways at different times and intervals. Expansions and retractions occur at specific occasions over time depending on consumer preference.
What happens is this: The entrepreneurs embarking upon the uti-
lization of the newly accumulated capital goods and the improved
technological methods of production are in need of complementary
factors of production. Their demand for these factors is a new ad-
ditional demand which must raise their prices. Only as far as this rise
in prices and wage rates occurs, are the consumers in a position to buy
the new products without curtailing the purchase of other goods.
Only so far can a surplus of the total sum of all entrepreneurial profits
over all entrepreneurial losses come into existence.
That’s Mises speaking a little after what you quoted.
Which answers point 2 and contradicts point 1
To answer my own question: An economy is retrogressing if either (1) capital is consumed and destroyed, even if doing so is profitable, such as due to a rise in time preferences or (2) there is accumulation of capital whose owners lose money in using it. This is because such a thing is not accumulation at all. These goods will cease to be capital in future rounds of production, because evenly rotating is not an option.
So, if profits > losses, that is, when foresight is correct, then an economy is progressing, if there is capital accumulation; and retrogressing, if capital depreciates without being replenished.
But an economy can retrogress, even if an attempt is made to accumulate capital, if use of that capital is not profitable.
To answer my own question:
second time I’ve seen ya do that.
ever heard of the boy who cried wolf?
Are you saying I should believe in myself and in my own great power to solve economic problems?
exactly.
Lol, I thought you were calling him a troll 