I’ve seen this statement in a bunch of ABCT explanations everywhere. I think it is not litteraly true, but a figure of speech, and I find it very troublesome and misleading to be included in ABCT explanations.
Why is it false: ‘entrepreneurs’ is not an homogenous aggregate, it’s not a single body of business-running which deals with other aggregations such as ‘workers’ and ‘consumers’. No!, each entrepreneur is a separate one, each entrepreneur concerns only with his enterprize, not with the structure of production. Each entrepreneur responds only to changes in the demand for his products.
So long as each entrepreneur has only one product to sell (assuming it) it’s impossible for him to interpret the lowering of the interest rates as a “signal that people are willing to consume more in the future” and respond to it by turning to the more roundabout processes of production. If the lowering of the interest rates affects him, it has to be only by the changes in demand of his single product.
In fact, the lowering of the interest rates is not a signal of the intentions of the people for the future, is an economic data which can have a lot of different causes, but surely the entrepreneur is not the one responsible for discovering them.
I think this is pretty obvious to everyone here, so why continue using that statement? It sees the economy as a set of relationships between classes of agents, not agents individually. This take is not austrian, it’s neoclassival, it’s confusing, it’s mistaken, it’s horrible.
(sorry for the bad english, if weren’t it I could have been clearer)
Lots of entrepreneurs can and do view the interest rate in the same manner. The interest rate is a price like any other with the quirk that it is the consumer that sells their deferred consumption, savings, to the entrepreneur who will use these savings to create something to sell to a consumer at a later date. And just like any other price it conveys an enormous amount of information especially when compared to the prices of other things. So it is certainly possible that the interest rate means the same thing to a huge number of people and a high percentage of people in the same manner that the average price of a gallon of gasoline would mean the same thing to a huge number of people and a high percentage of people.
The interest rate is also one of the few signals that an entrepreneur can use to determine the availability of savings that is commonly available and accurate. Maybe the entrepreneur can use the differences in price between two futures contracts or some other vehicle but these vehicles do not exist in the every day dealings of most people. The interest rate on the other hand is delt with by many actors in the real economy constantly. Infact all consumers use the interest rate and their preferences when purchasing things all the time. For example if the interest rate is say 15%, I would probably forgo buying lunch in a resturaunt and instead bring a homemade sandwich to work to save the difference. Or if the interest rate is 0 or slightly negative, I would probably take out a home equity loan (The worst thing to do: Negatively Save) on my house and buy a new car.
So long as each entrepreneur has only one product to sell (assuming it)…
It’s a very strong assumption, what justification do you have?
…it’s impossible for him to interpret the lowering of the interest rates as a “signal that people are willing to consume more in the future” and respond to it by turning to the more roundabout processes of production.
Why? Even if I sell one product, I can switch from manual labor to mechanical (and then to ever more an more automated) one.
It’s a very strong assumption, what justification do you have?
We can easily think of reality as being composed of several firms, each selling one product. If any of them possibly sell more than one, it occupies the role of more than one. But it doesn’t matter, this assumption is not important for the reasoning.
Why? Even if I sell one product, I can switch from manual labor to mechanical (and then to ever more an more automated) one.
The point is that if he switch his production process, from manual to mechanical or robotical or whatever, he’ll not do it because he is seeing a “signal that people are willing to consume more in the future”, but merely because it is worth for him to switch it. In any circunstance, it is the low interest rates and/or the growing demand for his products tell him buy a machine, never a prediction of the situation of the consumers in the future.
The interest rate is a price like any other with the quirk that it is the consumer that sells their deferred consumption, savings, to the entrepreneur who will use these savings to create something to sell to a consumer at a later date.
In a situation in which a single entrepreneur controls all the structure of production the forecast of future consumption based on the today levels of savings makes some sense. In all other situations the entrepreneurs think just about his market – the interest rate is important to him only because he takes loans (use the savings) to use in his part of the production process. If his product will reach the hands of the consumer only in a latter date he doesn’t care, he only cares about selling it to the next node of the production chain. Even if he wants to foresee the demand for his product at the future, It would be strange if he used the savings rate for this, since ther’s not a direct relation between today’s savings and future (a determined date) consumption.
The prospect of lower interest rate makes longer term projects appear more profitable in the calculation of an entrepreneur. It is a matter or business calculations for the entrepreneur that reveal to him the preference of consumers and not some personal philosphical reflections on the praxeolgoical meaning of rate of interest. Nevertheless, the praxeological meaning of these signals is precielsy that of time preference. It’s not clear exaclty to what you are objecting to.
i agree, a businessman without a background in AUSTRIAN economics would not even think about the cosumer future consumption, all that really matter to him is that he can borrow at a lower interest rates. The low interest rate doesn’t realy help him decide whether a demand exist or not becuase he doesn’t know austrian econnomics. He’ll know if a demand exists by observing the market and his surroundings.
But for a businessman who study AUSTRIAN economics,he knows that it is a good time to expand his business or start a new investment when the interest rate is low.
So i guess the statement would be much clearer if we change the word “willing” to “more likely” because they have the money to spend but we are not sure if they are actually going to spend.
The study of Austrian Economics will not help the entrepreneurs much except to become skeptical of the interest rates as they are set by fiat. But regardless of Austrian Economics, the entrepreneur has to estimate the what the time preferences of consumers are to determine if there are funds available to complete a project and if so then determine how much consumers will spend on his product or service versus other things. The only aggregate measurement (And it is not accurate as there is no realy way to aggreagate the preferences of millions of consumers) is the interest rate, the payoff to consumers for deferring consumption.
There is just no other data point that provides this much information about the future that affects peoples daily lives as much as the interest rate.