In his forward to The Tragedy of the Euro, describing the effects in 2007 of a credit expansion not backed by real savings, he writes:
Finally, consumer goods prices started to rise relative to the prices
offered to the originary factors of productions.
What does he mean by “relative to the prices
offered to the originary factors of productions”?
What’s wrong with just saying “Finally, consumer goods started to rise”?
Does he simply mean that consumer goods started to rise because the factors of production rose in price [which he mentioned earlier]?
Would appreciate any help.
Haven’t read that particular piece or the context its in, but I assume he is talking about the relative prices in the production structure and its relation to the interest rate. When time preferences fall in an economy, the relative prices of higher order goods rise (higher MVPS from a lower I.R) compared to the falling prices of consumer goods due to declining demand. The ratio between an entrepreneurs input prices (capital goods and originary factors of production) and his output prices in the ERE is the rate of interest. As time preferences fall, the decline in output prices and eventual bidding up of input prices results in a lower interest rate. The opposite of the above paragraph occurs when time preferences rise.
In a credit cycle, as actors continue to consume their income instead of save it (and in fact increase it due to capital consumption and unnatural falling interest rates), the profitability of the late stages, the “consumer goods industries”, the “lower orders”, or production processes that are shorter, appear more profitable than the earlier stages, the “capital goods industries”, the “higher orders”, or production processes that are longer. It is the economy’s way of trying to readjust itself in the face of credit distortion. As this becomes more aggravated, it signals to the entrepreneurs that their previous investments were erroneous and liquidation must ensue. The bust follows.
For an easy viewing of the text, the forword was published as a Mises Daily here. I didn’t look too closely at Numero’s explanation, but based on the context it sounds like he’s on the right track. (For more links and info about the book and its subject, check out the article on Mises Wiki).
What’s wrong with just saying “Finally, consumer goods started to rise”?
Because we cannot know a priori whether prices of consumer goods will actually rise; indeed they may even fall. What we do know is that in an inflationary boom (fueled by credit expansion and not by an increase in real savings) prices of consumer goods will be higher than they otherwise would be. And it is these higher prices for consumer goods, relative to the originary factors, that eventually manifest themselves as a “cluster of errors.” In a period of genuine growth driven by real savings, demand for consumers goods falls relative to that of originary factors. In a period of illusory growth driven by credit expansion, demand increases (relative to the levels otherwise reached) at both ends of the structure of production.
It reminds me of the case of inflation. Most people think of it as a general rise in prices. Of course Austrians differ here, and say that it is actually any increase in the supply of credit and/or the money supply; this increase will always lead to prices that are higher than they otherwise would be. Because other factors are involved (the demand for money, the supply of goods exchangeable for money, the demand for particular goods), we cannot know a priori whether the price of a particular good, or the “price level”, will be higher or lower than it was before. We can, however, know that prices will be higher than they would be without the inflation. This was the case during the 1920s - relatively stable prices throughout the decade, despite massive increases in productivity and production; this was due to the vast inflation undertaken during that decade, which caused prices to be much higher than they otherwise would have been, even though nominally prices were stable.