Posted tagged ‘Robert P. Murphy’

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 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 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


Must Reads For The Week 11/16/13

November 15, 2013
The pen is mightier than the sword...

The pen is mightier than the sword… (Photo credit: mbshane)

Obama Translated, at You need your political speak to english dictionary to understand what politicians say.

The Biggest Threat To Minimum Wage Restaurant Workers Everywhere?, at When the minimum wage is set above the value produced by the worker, businesses will find a lower cost substitute for the labor.

The Mirical Cure…? You can’t counterfeit your way to prosperity.

This Is How The President Plans To Un-Cancel Insurance Policies, at Unintended consequences happen when central planners try to plan what is still a qusi free market activity. It’s the same concept as trying to raise the minimum wage law above the market price.

The Economics Of Obamacare, by Robert P. Murphy, at The laws of economics are always in play no matter what plans Governments make.

Top Sectors That Throw Money At Congress, They all pay both sides of the aisle, it is called hedging their bets. When the difference is 65% or above, you have a good idea what that which party the better thinks will deliver the goods.

U.S. Oil Production At Highest Level Since January of 1989, by Mark J. Perry, at Free markets work in spite of government plans to make drilling for oil more difficult.

Progressive Government Fails, by Daniel Henninger, at Quote from the article, “The essence of modern Democratic progressivism is: “You will participate in what we have created for you, and you will comply with the law’s demands.”

Does Washington Know Best? by Walter E. Williams, at The amount of knowledge needed to centrally plan an economic activity is impossible for Government to know. No one individual or bureau of individuals knows this knowledge in a free market. Prices convey and coordinate this knowledge. When Government messes with prices through regulation, taxes, and subsidies, well just look at the Obamacare mess. It will get worse as they try to fix it through more “planning”.