So there is a “process of production.” This goes (let’s say) from right to left, sloping upward. As we arrive at the left end of the triangle, “consumption goods of a certain dollar value emerge.”
My question is, what exactly does this mean? My immediate mental picture was that this can be thought of as a factory process, where at every stage, value is added, until a Model T emerges from the factory. But this isn’t really it, is it?
Help me understand this please!!
Thanks
Could you also please post a link to the book/section you are reading, in order to help anyone else help get the context?
I am not too knowledgable on the subject of Hayekian Triangles, so I won’t be able to help you with those specific questions. Although I think I have an inkling, I would not want to lead you astray, so I will leave those to someone who knows a little more on the topic.
What I do know is that the value of Capital Goods are imputed backwards from the final goods (Consumption Goods). There is none of this “value is added each step of the way” from the early stage of production to the later stages.
It is a slightly complex topic as to how Capital Goods get their value, I would recommend Rothbard’s “Man, Economy, And State” (Chapter 1 goes over basics, Chapter 5 talks about the structure of production). I believe one of Rothbard’s examples to explain this concept deals with cigars and a cigar machine:
http://mises.org/resources/1082/Man-Economy-and-State-with-Power-and-Market
This might be a relevant resource which might answer your question on Hayekian Triangles. Roger Garrison’s book:
http://mises.org/resources/5057/Austrian-Macroeconomics-A-Diagrammatical-Exposition
Hello Tex. Thanks for your reply. Actually I am reading Garrison’s “…Diagrammatical Exposition” with delight. In addition I found great satisfaction in this video:
which is Garrison lecturing on the interrelationships of the “structure of capital,” interest rates, and so on.
I guess I am just a little bit stuck on this Triangle. What is it? What does it mean? The units of measure of the altitude of the triangle are ostensibly Dollars, but in what sense? in a given industry, or the overall economy? The short part of the triangle I guess are hydroelectric dams or other complicated and “long term” projects? But they “produce” consumers goods eventually? The highest part of the traingle is consumer goods. But why? Are they worth more dollars than hydroelectric dams??? Help!!
The triangle is a simple diagram which represents the stock of goods in an economy.
The above diagram is actually backwards; the original diagrams can be seen in Hayek’s Prices & Production:
The diagram represents the theoretical distribution of capital-goods in the structure of production. It’s main purpose is to illustrate the structure of production.
Again, sorry I can’t answer your specific questions on his usage of the Triangle, but these might help you grasp some related ideas.
Here is a picture which might help you imagine how it would work for a specific consumer good (in this case a pencil… thanks to Chris K).
http://img217.imageshack.us/img217/5599/ipencil.png
Here is Leonard Reed’s famous essay, “I, Pencil”, which might also help you grasp the concept:
http://www.econlib.org/library/Essays/rdPncl1.html
Every single final good has it’s own “structure of production” (steps and items which must be used in order to create the consumer good), and as you can even see even from that very simplified image of JUST A PENCIL, it gets very complex very fast (each one of the capital goods also has its own structure of production).
The small part of the Hayekian Triangle shows the “early stages of production,” or those goods which are furthest away from the final good. The larger part of the triangle shows the “later stages of production,” or those goods which are closest to the final good.
Examples of things at the “early stage” of a pencil is growing the wood tree, growing the rubber tree, and mining. Something towards the “later stage” would be a labelling machine to mark the pencil with “No. 2,” or a machine which presharpens the pencils before sticking them in the box.
I would personally recommend just ignoring the Triangle for now, and go get a better grasp on other concepts first. You can always come back to the Triangle (and the Garrison book) when you have a much better grasp of the basics.
Thanks guys for the thoughtful answers. So if the Triangle is “…the theoretical distribution of capital-goods in the structure of production…” then should the area of the triangle sum up to 1? Also, why does the hydroelectric dams (whatever) have a small altitude, and consumer goods have a high altitude? Isn’t that altitude related to their dollar value, or is it their frequency??
Sorry for belaboring this, I just am hoping for a sense of clarity.
Yes, the area of the triangle is 1. IIRC, Hayek writes in Prices and Production that approximately 75% of all goods are capital-goods, although it depends on the shape of the hypotenuse. In the first image, later stages have “higher altitudes” because there is a greater output of consumer goods. The more stages of production in the structure of production the more consumer goods will eventually be produced. It doesn’t have to do with their dollar value, just the quantity that will be produced.
Tex, thanks for the pencil diagram, very cool. Jonathan, thanks for your keen insight. I appreciate it.
For some reason I thought that the triangle represented a gain in value of a good until it is a finished good. Maybe that’s something else?
But anyway, this triangle seems a good way to tool for explaining ABCT. I think, however, that in Hayek’s The Pure Theory of Capital, that he goes for a 3-dimensional triangle. What is behind that?
Not for some reason, but for a good reason. The slope of the triangle represents the discount value, which is also the [money] price differential between each stage in the ERE. Obviously, there is a gain in value as you climb up the slope.
It’s never about just quantity as [wrongly] pointed out above. It’s about the marginal value productivity. As the structure becomes longer, it is the value productivity that is increasing.
So then that right side of the triangle grows bigger during booms. That’s an increase in quantity of capital goods and value of capital goods? Is the area of that triangle fixed at 1, or does it grow as the economy grows? In other words, what is the area under the curve?
Who cares about the area. The triangle is nothing but an abstraction. Here is the 1st right angle triangle I found in under 5 secs:
As the economy grows, a becomes shorter (consumer spending drops), and b becomes longer (higher stages of production are added). The hypotenuse becomes longer with angle A becoming more acute representing a lower of the interest rate. And that’s it!
Holding the money supply fixed, a shorter leg a represents the decrease in monetary spending on consumers goods and a longer leg b represents the increase in spending on production goods.
Garrison makes the triangle bigger because he has to align it with his production-possibility frontier curve that can only expand outwards to reflect growth. It adds more confusion the clarity.
So in the long run both grow, but for b to begin to grow a must necessarily shrink, or at least relatively speaking. Makes sense to me.
Ok well I am back to being confused.
Consider this statement as given above: “It’s never about just quantity as [wrongly] pointed out above. It’s about the marginal value productivity. As the structure becomes longer, it is the value productivity that is increasing.”
Ok so what exactly is the unit of measure of the altitude of the triangle?
No. What represents the more productive structure of the new triangle after growth is its length and more acute angle of the hypotenuse. Leg a shrinks and stays that way. Leg b is stretched and stays that way. The new triangle is the long-run ERE. Nothing further happens.
I think you are having a problem reconciling the new shorter leg a with the higher marginal value productivity of the new triangle. But if you understand that the legs represent monetary spending, the problem will go away as soon as you remember that prices are suppose to drop as the economy grows. In other words, shorter leg a represents less monetary spending on consumption. But real consumption has increased.
Again, I think the confusion stems from Garrison’s work. He makes both legs expand in the long run and so he has to break the process down to some alleged short-run and long-run sequence. The only reason he does this is so that it alligns with the growing production-possibility frontier curve that is also growing. It makes a nice and impressive power point presentation but adds only confusion in my opinion.
Money.
See previous post.
Hey Mercator, you definitely have the gist of what the Hayekian triangle is trying to capture; one should definitely think of the Hayekian triangle as representing an assembly line leading up to the creation of some final consumption goods (or, as you put it, perhaps a model T). However, I believe that some of the points you are bringing forward are not adequately dealt with in Garrison’s interpretation/exposition of the Hayekian triangle. Therefore, I’d like to try to answer some of your questions by focusing on Hayek’s original exposition of the Hayekian triangle (In Prices and Production as well as Pure Theory of Capital). However, I am going to take Garrison’s orientation of the Hayekian triangle (by which I mean, the triangle with time on the horizontal or “x” axis) as my point of reference, simply because by convention today one usually puts time on the horizontal axis.
First off, as people before me have noted, the “altitude” or “height” of the triangle is measured in units of money. The “leg” of the triangle, or its right most height, is the value of the consumption good(s) produced at some moment in time. However, the height of the triangle at intermediate points (i.e., along its hypotenuse) has meaning as well; it shows us the value of the intermediate goods that were used to produce the currently maturing output at some previous stage of production. However, contrary to what some previous posters have said, the area of the triangle does NOT have to sum to 1; in fact, in Prices and Production, Hayek has the area of the triangle sum to 120 (Well, his discrete version of it anyway- for reference see the second lecture of the aforementioned work). The area of the triangle can sum to, well, anything really; it simply tells us how much money is spent on the production of some set of goods that mature at a particular moment in time, from start to finish.
However, you brought forward a very interesting point earlier. Namely; since the Hayekian triangle shows the value of the capital goods, and finally the consumption goods, growing as you move through time, then it would appear that the value of the consumption goods produced at the end of the process must be “worth more” than any of the intermediate capital goods used in production; for example a hydroelectric dam must be worth less than the consumption goods it is used to produce. I get the feeling that this makes you uneasy, as it is not immediately obvious that this needs to be the case. For example, one might consider a production line using electricity from a hydroelectric plant to produce say, a SINGLE model T. Obviously a hydroelectric plant is worth A LOT more than a single car, so one might conclude from this that there must be something wrong with the model (or at least, one’s interpretation of it).
However, the problem with the above reasoning is that a hydroelectric dam is a durable capital good; this means that it can (and presumably will) be used to produce consumption goods at various different points in time. Therefore, when producers value a hydroelectric dam on the market, they do not value it simply because it can produce a single model T at some moment in the future; rather they value it because it can produce MANY model Ts (and other products as well) at many DIFFERENT points in time. But, the Hayekian triangle as originally defined only considers the value of the capital goods used to produce a set of consumption goods that are maturing at a single moment in time (Again, see second lecture of Prices and Production, specifically page 229 in Prices and Production and Other Works Mises.org edition) Therefore, if we want to account for the value of the hydroelectric dam that is used in the production of a single model T at some point in time, we do not add in the entire value of the hydroelectric dam; rather, we take into account the fraction of the value of the hydroelectric dam that was “used up” in producing that single model T. By “used up,” I really mean to say that we are accounting for the market value that is imputed to the hydroelectric dam because it can produce that single model T at some future moment in time (i.e. some portion of the dam’s value comes from the fact that people can use it produce a specific model T sometime in the future).
I apologize if the above is somewhat vague, but this is because by dealing with durable capital goods, we have actually moved beyond the simple Hayekian triangle as discussed by Hayek in Prices and Production. Why? Well, for the purposes of that particular lecture Hayek wants readers to treat the production process as only involving circulating capital goods (See footnote 43 in his second lecture). By circulating capital goods, I mean capital goods that either depreciate instantaneously (like a stick of dynamite; once you use it- it’s gone for good) or are themselves the consumption goods in some intermediate form (for example, fermented grapes that are not quite yet wine). In this case, every intermediate good used in the production of a single set of consumption goods is unambiguously associated with a single output at a single moment in time. So, when you’re moving along the Hayekian triangle from left to right, you might think of the height of the triangle as measuring the value of a cask of wine as it matures over time. The “capital goods” here, then, are really just incomplete consumption goods, so it makes sense that their value will increase as they are slowly completed.
Of course, most, if not all, production processes involve durable capital goods, so this simple model may leave something to be desired. Pure Theory of Capital was written, in part, to address this problem. I have briefly outlined Hayek’s solution to this problem above, but as should be evident, it gets quite complicated fairly fast. However, it turns out that you should still get a similar triangular figure, not much different from that given in Prices and Production; it just has a slightly different interpretation. This is probably why, I guess, Garrison does not mind using the Prices and Production type triangle to explain Austrian business cycle theory, while interpreting it in such a way that it still involves durable capital goods (I.e. I’m thinking of that picture of the Hayekian triangle where he shows the early part of the triangle involving mining, later parts showing processing of raw material, etc.); you can definitely do that, but explaining that whole process consistently and rigorously is, well… really complicated. Hence the complexity of Pure Theory of Capital.
Hope this helps clear things up!
Sam,
Wow! What a thoughtful and thorough post. I will re-read what you’ve written again (and again) for comprehension.
Thanks for taking the time to help.
My eyes are opening…
I see. My problem was that I was associating the vertical with value and not with prices. I’m perfectly fine with increasing value or constant value despite falling prices.
So inflation has a structure to it as well?
