I consider myself a recent convert to the Austrian school and feel like I have a pretty decent grasp on the structure of production via the Hayekian triangle. I understand the beneficial effects of increased savings and the role it plays in lengthening the production possibility frontier and thereby fueling economic growth.
The basis of this conclusion, of course, is that increased savings translates into a greater supply of loanable funds in the economy, which means lower interest rates and thus lower payments businesses will have to make to buy new capital goods. Makes total sense.
But now to my question: in this day and age, with artificially low interest rates and higher inflation, very few of even the most prudent, thrifty people I know put their savings into certificates of deposit or savings accounts. Most transfer around 10% or so from their monthly incomes into their brokerage accounts, where the savings are used to purchase securities, mutual funds, ETFs, and the like.
What I don’t understand is how this type of “saving” helps the economy. How does the purchase of stock in the secondary market (the mere transfer of an ownership claim from one person to another) increase the supply of loanable funds and lower interest rates? How does it lengthen the triangle? Answers are greatly appreciated.
That’s a good question. I’ve been trying to figure it out myself for quite a while. The closest I’ve gotten to some sort of answer is that when you save your money and purchase a stock in the secondary market your purchase results in a higher price per stock then it would it in the absence of your purchase. Therefore the aggregate value of the equity for the company you purchased stock from rises. This is the part that I’m not terribly sure about because I don’t know much about finance, but I think that a higher proportion of equity would result in an increased oppurtunity for that company to borrow more funds at lower rates.
How this corresponds to lengthened triangle is still unclear to me. If the stock were an ipo it would make sense since you provide the company with present goods in exchange for future goods, and the present goods are necessarily used for investment or time consuming processes. But in the secondary market it’s just a shuffling of owners that occurs so there doesn’t seem to be any necessary trade-off or lengthing of the triangle. When someone purchases stock (in secondary market) and relinquishes present goods to the seller , whether or not the seller uses it for consumption or investment is unkown, so there isn’t any necessary trade off.
Hopefully, others will have input on this. Sometimes I’ve wondered if I’m missing something obvious.
If you buy stocks, the value of the stock rises. If the values rise, then companies can sell their own stocks and use the extra cash to invest in capital goods. On the flip side of the coin, just the very act of you saving means a lengthened production structure since you would be better able to afford your own “higher order” goods since you’d have more cash for down payments for products like houses, cars, etc.