You seem to go out of your way to construct strawmen. I never said malinvestments couldn’t occur. I was simply explaining the OP to you.
so when you said
you were speaking what you knew to be false, in order to explain what to me exactly, that you are good at saying things that you know are false?
That was the point of the OP. I wasn’t advocating it, I was explaining it. I do think there is some truth to it but it is not a refutation of the ABCT.
Also, to deny the ABCT is not to deny malinvestment. Malinvestment can occur by other means, such as regulatory arbitrage.
These arguments always end up going in circles.
thank you. i did not need you to explain it. i knew it was wrong. you apparently knew it was wrong. but thought that i didnt understand it was wrong as well as you did. wtf?
I never said that denying ABCT and its explanations of malinvestment deny other malinvestents that arent related to the business cycle. denying malinvestments in a credit led boom certainly does trap one from saying that the bust reveals malinvestments. but perhaps we have teased out that you dont disagree, you were just hoping i noticed that other people disagree. again thanks for looking out for me. wtf?
of course, there is not a superior explanation for the malinvestments which are the distinctive feature of the credit-led boom bust cycle.
You didn’t address the point with that comment because you thought that the OP assumed malinvestment still occured; at least, that is how I interpret that comment.
Many people think that malinvestment due to regulatory arbitrage casused the boom and the bust. So those malinvestments are related to the business cycle in those theories.
If this is all you were implying with your previous comments, I wish you wold have been more clear. I must have been confused because it is a non sequitur.
your theory of regulatory arbitrage does or does not involve credit expansion?
It does not.
what would be a distinction between homogenous capital and heterogenous capital?
“Cameco Australia’s $4-million 1999 exploration program now equals Cameco’s uranium exploration program in Saskatchewan.”
http://www.cameco.com/media/news_releases/1999/?id=371
i am not sure if the above linked info is true. but it mentions that a company called cameco spent 4 million on uranium exploration.
scenario…
if the 4 million was a bank loan…i guess loaned (as i have read at mises sites and others) from various types of deposit accounts and the bank added credit (based on 10 % RR) in the amount of 3.6 million would this be the process that could lead to boom/bust cycles described at mises.org?
some of a 4 million dollar loan is spent from a lending bank to set up a mining operation in the wilderness…but the townspeole where the lending bank was still spend credit as if it was money (3.6 million dollars) .
iow
the original 4 million dollar loan purchased distant capital goods for mining and many goods and items in the town along with the 3.6 million in bank credit now in depositors accounts…pushing up various prices of consumer goods
i am unclear about unpleasant changes the production arrangement mentioned in the post.
would the additional credit-spurred demand of consumer goods be the be the catalyst for malinvestment?
for instance, a sudden increased demand for office supples leading to additional malinvestmetns in office supplies?
if 3.6 million in bank credit had not been created would the bank loan likely not have taken place?
Thanks to everyone who posted on this forum. Good to see people discussing things. I went out for the evening and did not look at this thread; if I did I would have been posting in between arguments. I do not want to requote people when someone else has already replied to them, so I will instead give out a more general response here.
Firstly, I hope I did not sound rude when I asked for well thought out replies to my questions. I was not expecting page essays like what I wrote, but instead diligent retorts to what I had been asked. One word responses, in my opinion, actually seems ruder.
In regards to homogenous capital, I thought that I answered that in my original post I understand that Austrians believe they view capital as a heterogeneous variable, the point I am trying to make is that when you look at their view of saving/boom/bust, capital really is considered a homogenous blob. George Bush saying he was a free market man does not make him a free market person, instead we have to look at his actions and conclude that in reality he wasn’t really laissez faire. Same goes for the Austrians.
For the Austrian analysis of saving to be correct, the inputs (the factors of production) for the stages closer to consumption must match up with the inputs (the factors of production) for the stages farther away. That is the crux of my argument. While I am not going to restate my argument again, I will post the paragraphs that form the body of it.
In comparing these two seemingly different economic constructs, it seems that the main difference from savings induced growth and boom/bust is the fact that in saving the consumers postpone consumption and “release factors of production” for businessmen in the higher stages to use, whereas in boom/bust these “factors of production” are not freed and being used for current consumption. Only when these materials are “released”, only when the top of the Hayekian triangle is lobbed off and used for other stages can the growth be sustained. When they are still used, businessmen must pay more to bid them away with cheap credit which causes a rise in the interest rate and eventual crisis. Essentially it seems as though the “inputs” for the consumer good stages provided the needed inputs for the later stages. De Soto explains this succinctly, stating “in fact each increase in the demand for productive resources in the stages furthest from consumption is mostly or even completely neutralized or offset by a parallel increase in the supply of these inputs which takes place as they are gradually freed from the stages closest to consumption” (De Soto 324).
So what are these inputs, “real saved resources” (A common expression I heard in advocates of this particular theory), factors of production, etc? Is there any degree of specificity in them? Tom Woods gives a couple of examples (see above quote), but even those are pretty vague. What should make us believe that the “factors of production” for lower stages will be the exact resources needed for the higher stages? Can the construction materials used to make a new Dennys be used for the completion of a Power Plant? Take this rather silly but illustrative example; society saves 1% more of their cash income, the restriction of consumption came solely from the cutback of fast food. America instead decides that it does not require as much food and will used their savings for investments. The derived demand effect occurs in some food industries; they suffer from a decrease in demand and decide to free up resources. The resources freed are primarily food workers, grocery clerks, capital goods used in cooking and processing food, additional construction materials that could have been used for building more restaurants and stores, etc. Now, with or without the concept of full employment of resources (it is a variable for the business cycle, the theory can deal with whatever degree of resources are idle), these factors of production are the “real saved resources”.
Going back to the consumers investing their funds, the interest rate is lowered and the time discount effect occurs. According to the Austrians theory these resources should be fully incorporated into whatever resources are needed by the higher order businesses (See the De Soto quote above). For the theory to work correctly the resources would, because if businessmen needed more than were “given”, they would have to bid them away from earlier stages and raise costs and borrow more, and then not possibly complete any projects due to a lack of required materials. In any ABCT I have read, there is little to no mention of the actual resources themselves and whether they need to be specific or not, all that is said is factors of production geared towards consumption can be used to fuel earlier production. Is there mention of training for different labor, specificity of capital goods, distance between where the factors of production were freed up and where they will be used, etc? No, all that I am aware of is that the capital blob of from any saving of resources can be used to fuel the expansion of earlier industries. This seems to be the fatal flaw in the Austrian argument, what one man saves may not necessarily be the resources that another man requires. One man’s trash may really not be another man’s treasure.
So for now I will limit my question/critique to that, the fact that the Austrians do really consider capital as a flexible input variable for any stage of production. In the Austrian analysis whatever is saved must compatible with whatever materials higher order stages need. So the construction materials for the new Dennys are mystical bag of materials that can be used for whatever investment the higher order industries want to make. In any work on the matter that I have read they make little reference to transition or actually the specificity in the factors of production. De Soto in his massive work only refers to “factors of production”, almost sounding mathematically when he says that “in fact each increase in the demand for productive resources in the stages furthest from consumption is mostly or even completely neutralized or offset by a parallel increase in the supply of these inputs which takes place as they are gradually freed from the stages closest to consumption”. If A is the factors of production used in lower stages, and B is the factors in higher, than De Soto and the theory make it out as A=B, the capital required for one thing is compatible with another.
I beileve this is incorrect and the crux of your misunderstanding.
Care to elaborate?
@Duckinstein: "Is there mention of training for different labor, specificity of capital goods, distance between where the factors of production were freed up and where they will be used, etc? No, all that I am aware of is that the capital blob of from any saving of resources can be used to fuel the expansion of earlier industries. This seems to be the fatal flaw in the Austrian argument, what one man saves may not necessarily be the resources that another man requires."
I don’t think it is even a flaw. You think of how a clerk serving at McDonalds can be transferred and employed at, say, General Motors’ new car building project as a junior engineer. How much ever valid your example may be, it is quite aloof from reality.
Businessmen do have a rough idea of the availability of various resources, and their prices over a particular period of time. As the period elongates, the lesser become the accuracy of business forcasts, usually.
Try a better example, interest rates plunge and GM decides to plan out a ten year project which requires some 200 junior engineers. Some entrepreneur who is into the education industry anticipates this demand for junior engineers over the next decade, and may be even longer. So he makes out a loan and starts with building a new engineering college to train junior engineers in 3 or 4 years. Even the already-existing colleges will expand the capacity of their engineering courses expecting future demand.
I am a guy from India, and trust me, the IT revolution out here churned lacs of IT engineers. Companies started having close ties with universities for almost the first time in our history, and started employing freshers.
The market is really quick to adapt, provided it is allowed to express the right signals.
De Soto’s very clearly explains how capital goods are very much not homogeneous in diferent parts of the same book, here is a good example:
The errors consist of launching and attempting to complete a series of investment projects which entail a lengthening and widening of the capital goods structure, projects which nonetheless cannot come to fruition, due to a lack of real saved resources. Moreover once resources and original factors of production have been transformed into capital goods, these goods become non-convertible to a certain extent.
In other words, many capital goods will lose all of their value once it becomes clear there is no demand for them, they were manufactured in error and they should never have been produced. It will be possible to continue using others, but only after spending a large amount of money redesigning them.
The production of yet others may reach completion, but given that the capital goods structure requires that the goods be complementary, they may never be operated if the necessary complementary resources are not produced. Finally, it is conceivable that certain capital goods may be remodeled at a relatively low cost, though such goods are undoubtedly in the minority.14 Hence a widespread malinvestment of society’s scarce productive resources takes place, and a loss of many of its scarce capital goods follows. This loss derives from the distorted information which, during a certain period of time, entrepreneurs received in the form of easier credit terms and relatively lower interest rates.15 Many investment processes may also be left half-completed, as their promoters abandon them upon realizing they cannot continue to obtain the new financial resources necessary to complete them, or though they may be able to continue to secure loans, they recognize that the investment processes lack economic viability. In short the widespread malinvestment expresses itself in the following ways: many capital goods remain unused, many investment processes cannot be completed, and capital goods produced are used in a manner not originally foreseen. A large portion of society’s scarce resources has been squandered, and as a result, society becomes poorer in general and the standard of living drops, in relative terms. (Money, Bank Credit, and Economic Cycles pages 415-416)
You also left out the end of the paragraph from page 334, which I’ll quote below for everyone’s benefit (emphasis mine):
Thus for entrepreneurial coordination to exist between the stages in the productive structure of a society which is immersed in a process of increased saving and economic growth, it is particularly important that the corresponding factor markets, especially the markets for original means of production (labor and natural resources), be very flexible and permit at a minimum economic and social cost the gradual transfer of these factors from certain stages of production to others.
When taken together it is pretty clear these two quotes make very clear De Soto’s view that labor and natural resources are much easier to move between the various stages of production than other capital goods. He also shows that capital goods used in malinvestments can either be modified for other uses at a cost, become completely worthless, or become worthless until such time as complementary factors of production change in price. The same concepts could be applied to a dramatic shift in consumer preferences .
But that’s besides the point. Entrepreneurs will not bid away capital goods that are non-transformable, they will bid away those that can be most profitably put to use. That would include easy to retrain labor, resources, and capital goods that are easily modified for use in the higher stages of production. Capital goods that are not easily modified will not be bid away without an enormous change in the savings rate, why would they?
Also in the short run, if the labor, resources, and capital goods are not bid away from the lower stages of production, where do they come from?
Your view of De Soto’s arguments is a strawman, as you would see if you read through the rest of his book, and as you can see from the quotes above.
For the ABCT to work it is enough, that extra credit will induce the production of “earlier stage” production goods by biding away original factors of production - labor and raw materials.
They are not homogenous, but if you understand how any capital goods are produced, you must see, that any lengthening of the production structure is done by using original factors to produce different capital goods then otherwise.
If it is due to capital accumulation, there is no problem. If it is done by biding away original factors from shorter processes, we have an unsustainable structure of production.
Lac = hundred thousand. [:)]
And you hit the nail on the head. Austrian critiques forget that the market is dynamic, and Austrians don’t expect that the supply of capital will be fixed or appropriate for every fluctuation. Obviously where demand changes, inventories will be created AND cleared as the capital structure adjusts to changes in consumption and saving. That is why a consumption economy differs in structure from a savings economy. Stone Cold Creamery probably doesn’t happen in a low time preference economy.
I’m not sure that there is really any “Austrian view” of capital. Capital is capital. A factory is capital. A store is capital. The more capital you have, the more goods you can produce. There is capital that produces capital (e.g. cranes and bulldozers) and capital that produces the capital that produces capital (whatever machines are used to build cranes), and so on. The more capital you have, the more productive economy you have. More capital in the stages furthest away from consumption (the capital that builds the capital that builds the capital that builds the capital that produces consumer goods, and so on) means that the economy can grow at a faster rate as more capital goods, and thus more consumer goods, can be produced. More loanable funds means that more capital equipment can be produced. A lower interest rate means that capital equipment with lower rates of return will be produced more often.
Ultimately, as I’ve stated before, there is absolutely no requirement that the interest rate increase for ABCT to be correct. If there is a set interest rate, as there is today in most countries of the world, ABCT still applies. So say, even if the Federal Reserve kept interest rates forever at 0.25%, the business cycle would happen. This is simply because the money that goes towards the earlier stages of production in the form of loans would then be spent on consumption goods, increasing the profitability of consumer good production and increasing inflation, thereby harming the profitability of the early stages of production. This is enough to put workers out of work in the early stages of production, which then turns into a downward economic spiral, forcing more and more businesses to lose profitability until only the strongest businesses survive and are able to turn the economy around.
You can’t chastise Austrians for viewing the economy as non-dynamic and then say this. Cold Stone can occur in a low time preference economy, it simply depends on the size of the economy we’re talking about. Obviously, Zimbabwe does not have the necessary capital or wealth to make Cold Stone, or even cable TV, a simply past-time. On the other hand, if you doubled the economy of a country like Luxembourg, the wealth produced by the amount of capital present would make Cold Stone simply another past-time that a low time preference economy would be able to sustain.
My point here is that someone who earns $200k a year can easily afford to save 50% of his income and at the same time eat out often and get a ton of ice cream from Cold Stone.
Again, I’m going to remind you that not understanding a theory or someone’s position does not make them/it wrong, and you right. The OP needs to realize that no one is going to take 2 hours out of their day to refute a nobody who doesn’t understand ABCT, at least not for free. You’re right, there are trade cycle theories which don’t involve boom-bust, such as Schumpeter’s, but they’re all wrong.
At the basest level, resources are “capital” (i.e., loanable funds, cash, etc.) and labor, both of which are fairly mobile.
A million dollars in the bank, waiting to be loaned out is the same to me as it is to you. But once I take that $1M and convert it to lathes and drill presses, you’re going to have one hell of a time making basketballs with it, if my table-leg manufactory goes out of business.
So one problem that arises is that capital goods are not mobile, and generally well-suited for only a small handful of tasks.
So, following the credit/capital theory put forth by DeSoto/Garrison/etc., capital is bid away from some sector of the economy (theory says short-term productions) towards another sectory (thy says long-term productions) whereupon it is converted into capital goods which are heterogeneous, and this is where the problem occurs, because these capital goods are not easily or inexpensively repurposed. When it is revealed that these investments were made in error, as a result of the credit influx/boom, a real diminution of material well-being occurs, because a lot of capital goods are essentially junked/squandered.