Posted tagged ‘Production Process’

Federal Reserve Policies Cause Booms And Busts, by Richard M. Ebeling

September 26, 2014

In God (or money) we trust - making money on the hand printing press - stock photo

Federal Reserve Policies Cause Booms And Busts (read here at mises.org), is a fantastic article by Richard M. Ebeling, explaining what happens when central banks, like the Fed, intervene in the economy. Electronically printing counterfeit money and artificially lowering interest rates are the tools the Fed uses to “improve” the economy. The Fed may pay lip service to the free market, but the policy makers at the Fed truly don’t like the outcome resulting from the voluntary decisions individuals make in the free market. If they did, they wouldn’t intervene after the fact to try to exchange what they want the economy to look like, for what actually exists as a result of what each individual decides to produce, consume, save, and exchange.

Their tools of intervention, electronically printing counterfeit money and artificially lowering interest rates, send false information through the market. People in the market start to make decisions on what to produce, consume, save, and exchange based on this false information. The structure of the production process has no anchor to reality and the result is distortions and malinvestment. Scarce resources are allocated to areas of the economy that can’t be sustained unless ever-increasing amounts of electronically printed counterfeit money is pushed into the economy. The economic forces of supply and demand are always trying to reach equilibrium (balance). These economic forces, that are trying to correct the interventions of the central planners, will eventually win.

HERE ARE SOME EXCERPTS FROM THE ARTICLE

“In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market.”

“Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods...”

“…There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage;”

“…In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken”

“…The twin result of the Federal Reserve’s increase in the money supply……is an emerging price inflation and an initial investment boom…”

“…The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.”

“Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

Related ArticleThe Role Of Interest Rates In A Market Economy, by austrianaddict.com.

Related ArticleThomas Woods Explains The Austrian Business Cycle Theory, by austrianaddict.com.

Related ArticleCounterfeiting By The Federal Reserve, Although Legal, Still Results In Theft, by austrianaddict.com.

 

 

Producing Capital Goods, Requires Restricting Present Consumption

August 29, 2014

Understanding the role capital goods play in an economy is important, but understanding the process of producing capital goods is more important. Using capital goods allows individuals to become more productive over time. Capital goods are scarce, they don’t magically appear. Present consumption has to be foregone to save the resources and time needed to produce capital goods. The foundation of the advance in the worlds material standard of living is due to the capital structure that has evolved over time.  The two articles below explain Capital Theory using analogies that are simple to understand. The first by Mark Tovey is from this week, and the second is by Robert P. Murphy and is from Oct. 2008, which was in the middle of the economic crisis.

Austrian Capital Theory And The Dawn Of The Planet Of The Apes, by Mark Tovey, at mises.org. Here are a few highlights from this article.

“The adoption of ever-more roundabout and convoluted production processes is, paradoxically, the hallmark of economic development. This is not, of course, because time-consuming methods are inherently more productive. If that were the case, we could increase output by simply working more slowly!…..roundabout methods are immensely more productive than their labor-intensive counterparts, hence it is why the more complex methods have come to replace the labor-intensive ones in the developed human economies of the world.”

“In the process of economic growth, saving is crucial. No matter how ingenious the individuals comprising a society, if the means to forgo present consumption are unavailable, capital goods simply cannot be created. Crude, labor-intensive methods of production will then necessarily be employed,”

The Importance Of Capital Theory, by Robert P. Murphy, at mises.org. Here are a few highlights from this article.

“The basic Austrian story is that during the artificial boom, workers’ labor and other resources get channeled into investment projects that aren’t compatible with the overall level of real savings. Sooner or later, reality rears its ugly head, and the unsustainable projects have to be abandoned before completion. Entrepreneurs realize they were horribly mistaken during the boom, everybody feels poorer and slashes consumption, and many workers get thrown out of jobs until the production structure can be reconfigured in light of the revelation.”

“As our simple story illustrates, in modern economies workers use capital goods to augment their labor as they transform nature’s gifts into consumption goods. Because of the time structure of production, it is possible to temporarily boost everyone’s consumption (with Government or Fed stimulus), but only at the expense of maintaining the capital goods, which are thus “consumed.” At some point, engineering reality sets in, and no “stimulus” policies can prevent a sharp drop in consumption.”

Related ArticleCapital Consumption, aka, Eating Our Seed Corn, at austrianaddict.com.

Myths About Capitalism

April 4, 2014

Many people think big businesses like free market capitalism. The truth is when big businesses were small they liked free market capitalism, because it allowed them to compete with bigger businesses for a share of the market. Once these businesses get big, they don’t like competition. They want to protect their position in the market, and the only way to do that is to try to get Government to pass regulations that makes it difficult for their competitors to compete. This is crony capitalism.

Free market capitalism rewards people who are good at production. They are rewarded by consumers who vote with their dollars on who provides the best product or service. Crony capitalism rewards people who are good at political games.

Free market capitalism uses scarce resources more efficiently than the waste that occurs in a crony capitalist system. {Solyndra}

Top Three Common Myths Of Capitalism, Video by learnliberty.org.

Here is a quote by Murray Rothbard,

“The market promotes and rewards the skills of production and voluntary cooperation. The Government enterprise promotes the skills of mass coercion and bureaucratic submission…and those who get to the top will be those with the most skill in that particular task.”

Related ArticleWalter E. Williams: Free Market Capitalism Creates A Higher Standard Of Living For Everyone, by austrianaddict.com.

Related ArticleWhy Is Capitalism So Unpopular? by Art Carden at mises.org. Excerpt from the article.

“Under capitalism, the common man does not need an intellectual vanguard or a group of virtuous surrogates to make his decisions for him or to defend him against the rapacity of his fellows. He can do just fine without our help, thank you very much, and would be much obliged if we would go back to our ivory towers and leave him alone.”

Related ArticleDo Capitalists Produce Nothing, by D. W. MacKenzie, at mises.org. Excerpt from the article.

“Capitalists who improve production plans serve the needs of consumers and produce economic progress. This is how the system that we accurately call “free enterprise” actually works. Capitalists who participate in the redistribution of wealth through government policy produce disruptive production plans and economic waste. That is how the system that we accurately call “crony capitalism” works.”

 

Consumption Depletes What Has Been Produced And Saved.

April 26, 2013

CONSUMPTION, PRODUCTION, SAVING

Repetition is the best way to learn something. So lets take another look at consumption, production, and savings. When you consume you destroy, deplete, dissipate, devour, decrease, reduce, exhaust, use up, the supply of. When you produce you create, cause, provide, make, generate, bring forth, the supply of. When you save you accumulate, accrue, invest, reserve, compile, amass, build up the supply of. Production is the creation of wealth which can either be saved and invested for future production, or depleted or destroyed by present consumption.

PRODUCTION PROCESS

We become wealthier when we produce goods at a rate above what we consume. (more…)