Question about Rothbard article and description of boom/bust cycle

Economics Economics Questions
1

I’m reading this article by Murray Rothbard (http://mises.org/daily/3127) describing the boom/bust cycle of the capitalist economy. It’s all making sense to me up to this paragraph:

The problem comes as soon as the workers and landlords — largely the former, since most gross business income is paid out in wages — begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn’t want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don’t save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression in the producers’ goods industries. Once the consumers reestablished their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods and had underinvested in consumer goods. Business had been seduced by the governmental tampering and artificial lowering of the rate of interest, and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers reestablished their old proportions, it became clear that there were not enough savings to buy all the producers’ goods, and that business had misinvested the limited savings available. Business had overinvested in capital goods and underinvested in consumer products.

As I understand this, Rothbard is saying that the consumers (workers with more expendable cash due to higher wages) are spending their money on consumer goods and not on the capital goods that business men were expecting them to spend on.

This doesn’t make sense to me, as I’ve never seen workers buy, “Machines, capital equipment, industrial raw materials, etc…”. Entrepreneurs buy these sorts of things, workers buy consumer goods. Even in the case of a true downward shift in time-preference (not a false one created by government manipulation of interest rates), workers don’t buy capital goods, they save in banks, maybe the stock market.

Is Rothbard expecting a certain percentage of workers to become entrepreneurs under these conditions?

Is Rothbard speaking of indirect investment in these type of goods, through investment in the markets? Doesn’t really make sense either, because investment in a production company isn’t going to move any more units…

Hope my question makes sense, thanks!

2

No, what he means is the boom in the capital goods industries causes them to hire more workers. The problem begins to arise when these workers, whose time preference has not changed, begin spending their money on consumer’s goods (and there is insufficient investment in these goods, relative to new demand.) IOW, there has not been an increase in savings commensurate to expansions in the higher order goods industries, and thus their expansion is unwarranted and prone to collapse, when entrepreneurs should’ve sustained previous levels of investment in consumer’s goods instead of diverting them to capital goods industries. For a sustained expansion of output, TP must change too.

-Jon

3

Maybe I don’t understand the definition/relation of capital goods Vs consumer goods well enough. It seems to me that a boom in consumer goods/services would necessitate a boom in capital goods/raw materials. Consumer goods have to be manufactured, right?

Is it just that the equilibrium between consumption/saving is reached before capital investment pays off?

I do understand what you mean when you say that expansion is unwarranted and prone to collapse. If the consumers don’t have the savings to support long term higher levels of consumption it’s all a house of cards waiting for a disruption to knock it down.

Thanks for your reply. Hope I don’t sound too lame, I’m pretty new to economic theory but I’m trying to learn.

4

The boom is in the capital goods industries, not consumer’s goods markets. The latter do enjoy a temporary rise, though, because of the more prosperous workers in the capital good’s industries, who are beneficiaries of the boom, and with unchanged TPs, choose to spend their money on consumer’s goods.

-Jon

5

OK, I think I was being thrown by his wording more than the concept. I’ve read a couple other pieces on the austrian theory of the business cycle and it makes sense to me.

It seemed like Rothbard was was saying that consumers faced a choice between saving more money and purchasing capital goods with it or spending their money now and buying consumer goods. That’s what was throwing me.

Thanks for your replies Jon.