Structure of Production Diagram - Please Critique This

Economics Economics Questions
1

I have struggled with visualizing the Structure of Production. The more I read about it, it seemed like a definite shape began to appear, but I did not see anything in the writings the corresponded to what I was visualizing (other than the Hayekian Triangle). So I drew up this diagram. This is only one in a series of diagrams I have put together to describe the following aspects of AE:

  1. Structure of Production (the “summary” diagram is show here). Other diagrams show how this was built from the ground up, along with a narrative;

  2. Micro Economic Analysis: One Actor and Two Actors - Division of Labor;

  3. Macro Economic Analysis: How Individual Micro Structures Roll Up into a Macro Economy;

  4. Sound Lending;

  5. Unsound Lending (Fractional Reserve Lending; The Affect on the Structure of Production;

  6. Taxation and Government Spending; The Affect on the Structure of Production;

I am asking for a critique of this so I can determine if I am on the right path. My goal is to create a way for those new to AE to visualize the structure of production, but I do not want to introduce fallacies, etc.

https://forum.freecapitalists.org/members/chloe732/files/structure-of-production0003.jpg.aspx

2

I hope you take this constructively.

I think your diagram is terrible. The Hayekian triangle displays the relationship between the level of capital invested in a particular stage of production and that stages temporal removal from final consumer goods. I’m not sure what you’re trying to illustrate. My best guess is that it is the process of capital accumulation, not the structure of production. If that is so, it would be better to create a process flow diagram than a graph. You should remove the arrow which labels time as moving clockwise on the diagram. It is unnecessary since there are connector arrows displaying which process is prior to another process. There are various process flow software available, the most standard being Microsoft Visio. You should also remove the life-death cycle since a capital goods stock can be inherited and can be passed on and therefore does not necessarily start or end with a person’s lifetime.

If I am wrong and you really are trying to illustrate the structure of production, you should just try to improve on the triangle. Hope that helps.

3

I take your comment’s constructively, and do appreciate the feedback.

The diagram is based on the Crusoe analogy and illustrates the relationship between the pool of real savings, early stage and late stage goods. I am not trying to duplicate or improve upon the Hayekian Triangle; the triangle needs no improvement as it explains exactly what it needs to explain. It is difficult, however, for someone new the AE to understand what the triangle means (at it was for me).

The arrow across the top is there to illustrate that the left side of the diagram is “early” stage, and the right side is “late stage”. As the process continues, an increased level of real saving supports a more round about structure of production (the diagram will spiral outward). The real interest rate decreases as the structure shifts to the left, and increases as the structure shifts to the right (not shown, as I was trying not to clutter it up with too many things at once).

The effect of central bank intervention is readily illustrated as the structure shifts to the left based on an artificial pool of real savings. All that happens from central bank money printing is that real goods are diverted away from the sustainable structure toward an unsustainable structure; the boom. The pool of real savings becomes depleted, and the unsustainable structure collapses; the bust. Similarly, the effect of taxation, government borrowing and spending can also be illustrated, demonstrating that there is no increase in real goods or wealth from this activity, it merely reallocates existing resources.

Finally, I believe the “subsistence” and “life and death” cycles are on point; I think you took a different interpretation. As the pool of real savings is damaged by central bank intervention, it becomes clear that the structure may shift all the way back to subsistence, or even result in the “death” of the economy. See Daily Mises article by Lilburne, below, for a description of this.

I do have a narrative that goes into detail about this diagram and what is it that I am attempting to do. I will consider attaching it as a separate file.

Well, I did ask for a critique. I just don’t know how it can be terrible since it is consistent with what I have read so far, including the Garrison powerpoint presentation. Also, read this post by Lilburne and you will see that I merely illustrate what is being discussed. How can that be “terrible”? Seems useful to me. http://mises.org/daily/3917

4

In reply to: Lilburne from 01/03/10:

Lilburne, this is my reply to your question about the placement of the “demand for money” on the diagram.

Getting back to my diagram, I added a file called “Demand for Money”. https://forum.freecapitalists.org/members/chloe732/files/Demand-for-Money2.jpg.aspx

Here, the economy has become more round about, and the structure has spiraled outward. My concept of the demand for money is it is like a shock absorber. I think of it as “cash in the pocket” so to speak.

Its placement on the diagram is explained as follows: Consumption is deferred. Crusoe chooses to defer consumption of berries. He could place them in the pool of real savings, but this is merely a figurative holding tank until the berries are invested in the building sticks and nets (factors of production). In other words, by placing berries in the pool of real savings, he is really intending to invest in factors of production.

Crusoe could instead choose to defer consumption to increase his cash holdings (of berries). This would be to satisfy his increased demand for money. In the diagram, the “demand for money” swells, it is now larger than it was during previous outward spirals.

Crusoe now has several choices. Following the dotted arrows: 1) he could consume these berries at a later date (demand for money would decrease); 2) he could decide to invest in sticks and nets, and move them to the pool of real savings to maintain an existing structure (demand for money would decrease); 3) he could increase the pool of real savings to extend the structure (demand for money would decrease); 4) he leave them in his pocket. Human action is the guide, subjective value scales determine Crusoe’s actions. Later, it will be shown how central bank and government intervention distort the entire process, leading to the disastrous effects you describe in your blogs.

I believe what I am describing here is Mises’ “Evenly Rotating Economy”. The diagram should be thought of as being in motion, rotating clockwise. The various circles shown are expanding, contracting or staying constant, but economic activity constantly flows through the arrows. The diagram shows both flows and stocks; Some may grow, while others contract. The structure may spiral outward or inward depending on the pool of real savings. A sustainable structure depends on the pool of real savings, and that is what is damaged by the central bank during money printing (credit expansion).

I envision someone turning this into an interactive format, so we could actually watch the structure spiral outward and inward due to fee market effects or by central bank / deficit spending influences. I do not have the software skills to make that happen.

EDIT: The most important feature is the “pool of real savings”, which determines the “round aboutness” of the structure of production. The “demand for cash” simply being explained / elaborated here.