I’ve been having a friendly debate with somebody these past few days, and he’s raised a question that I’m unable to counter due to a pounding headache stripping me of complex thought processes.
“why do middle-stage goods decline in supply, forcing savings and directly precipitating the ‘bust?’”
Answers appreciated.
hmmmm. what prompted that question to be asked? post the full transcript maybe.
I’m not sure how this indicates a flaw…
That doesn’t make much sense. ABCT is more about the relative prices of higher order goods vs. lower order goods. Low interest rates increase the relative prices of higher order goods, since higher order goods are generally purchased with credit. When consumers get the newly printed money and re-establish their preferences, then the relative prices of lower order goods rises, since consumers generally purchase lower order goods like food, clothing, etc. I’m not sure what “middle-stage goods” have to do with this. How do you even define what a “middle-stage good” is? Can you even give any examples? Just differentiate between items whose prices are sensitive to interest rate movements (e.g. housing, cars, capital machinery, land, etc.) and items whose prices are not sensitive to interest rate movements (e.g. clothing, food, entertainment).
He got in a real frenzy about defining middle-stage goods. Since I was graced with a headache(Possibly thanks to him), I was only able to ask for what he meant by middle-stage goods.
He thus kept telling me to refer to the Hayekian triangle and insinuated I was illiterate or simply inexperienced.
Thanks KK, I’m going to ask him that question and see if I get a clearer answer.
Apparently this is what he means by middle-stage:
“. A fisherman fishes with his bare hands, and for awhile this is alright. Then he decides he wants to catch more fish. His temporal preferences change, so he invests time—taking away from his yield of fish—to build a fishing pole. ..this is an expansion of the Hayekian triangle, which also expands the PPF. How does this happen? Savings. We lessen our consumption so that we can invest the time required for the task of building the rod. Our finished product is the fishing pole, but actually, a middle stage good in this process would be the individual pieces of the pole. ABCT necessitates that this scenario happens -without- the initial desire to save…”
Er, why does the fishing pole have to be built before we have the desire to save?
so by middle-stage he means higher stage, not an auspicious start.
perhaps if he were to cast his anecdote in terms of the Misesian ‘master builder’ he would be considering ABCT on its own terms.
“ABCT necessitates that this scenario happens -without- the initial desire to save…”
No, it doesn’t.
He also seems to be using possibly conflicting, and certainly ambiguously non-interchangeable definitions of “investing”. Typically when someone talks about the lengthening of the structure of production, they are talking about re-allocation of capital goods (not merely “time” in the sense of waiting longer). I mean, in the example he gives, the fisherman hasn’t “invested” anything other than his time/labor, which is to say he A) reduced his consumption and/or B) took a risk that he might end up worse-off, if the fishing pole idea didn’t pan out.
“A” suggests that his consumption was already above subsistence levels, and so he was in-fact capable of “the initial desire to save”. Whether he stockpiled fish for the duration in which he made the pole, or simply reduces his consumption and allocates, e.g., 50% of his time to fishing, and 50% of his time to manufacturing the fishing pole, really is not terribly relevant.
Ah, now he appears to be desperately attempting to save face.
Is his attempt to link middle stage goods as a fatal flaw in ABCT.
"The fisherman starts to SAVE more when he wants to take a break from fishing to build the fishing rod, to do this he must LESSEN his consumption. That’s what the ABCT says must happen in order for the triangle to grow and for capital to accumulate for such a purpose. Investors—in this case the fisherman himself—realize that the fisherman’s temporal preferences have changed and the extra capital is re-allocated accordingly.
Now, when I said the ABCT necessitates this scenario happens without the initial desire to save, I was correct. Because the ABCT says that investors are mistakenly lengthening the triangle—by way of an expansionary monetary policy from ‘gov’t’ or whoever—because they are duped into believing temporal preferences have changed."
Was his “genius” refutation.
“Because the ABCT says that investors are mistakenly lengthening the triangle—by way of an expansionary monetary policy from ‘gov’t’ or whoever—”
It does say that.
It says nothing, however, about Robinson Crusoe and his fishing pole.
The Crusoe economy is the absolute antithesis of a manipulated market where booms/busts are even possible. In this or in any non-maniuplated economy, it is an objective fact of reality that savings/investemt precedes a lengthening of the structure of production.
As a theory of booms/busts in a manipulated economy, the ABCT simply doesn’t say anything about this.
If Robinson is led to believe that he has saved more than he actually has and reallocates his resources accordingly, I don’t see how this isn’t an analogy to the ABCT. All that is necessary for the Crusoe economy to obtain the qualia of ‘manipulated’ is for Robinson to misjudge his temporal preferences based on faulty information. In the modern economy this of course would be a government of some type, but in a simple fisherman analogy, it could be as simple as Robinson misjudging his savings or one of his friends giving him false information about his savings.
You are taking the analogy too literally, in my opinion.
Incidentally, I have heard the ABCT framed from a middling goods perspective and also from a higher versus lower order goods perspective. Both essentially discuss the same thing: each end of the triangle pulling against each other against those areas between them.
Another word for such a thing is malinvestment, which is a key component of the ABCT.
Right… ABCT is not an overinvestment theory, its a malinvestment theory. its only overinvestment in the rather redundant sense that investing more than nothing in something thats a malinvestment is an ‘overinvestment’
Which then would make the analogy appropriate, because Robinson misallocated his resources by investing in a faulty venture based on bad information.
I agree that a fisherman could be misled into a malinvestment ( and more easily if his government issues fake-inedible fish into existence in his stock, they ain’t helpin’ even if it ‘feels good’ to wake up to more things that look like fish in your store than you had put there the night before)
Well it seems like that was the purpose of the analogy. It was just a crude analogy, but I got the point of it.
He’s still whining about the “fatal flaw” of ABCT not properly taking into account middle-stage goods. He pointed out that article about empirically examining the ABCT as proof of middle-stage goods being a key component of the theory. Now he’s accusing me of being naive because he’s given me a headache from trying to reason with him over his stubborn position. Help?
what is the definition of ‘middle stage good’ ? higher stage and lower stage are categories to which any good can be related to any other good.
this tree is higher than that log
this log is higher than those cut blocks
those blocks are higher than those carved ornaments.
and the otherway…
These cut blocks are lower than this tree.
This ornament is lower than that log.
how does this work with middle order? does he just mean that the cut blocks are between ornaments and logs.
which is another way to say that its a higher order good than an ornament and a lower order good than a log ?