Austrian Economics Question

[drpiotrowski]

I've been reading Murray Rothbard's America's Great Depression. In one of the endnotes, he explains that:

There is no arbitrary choice of investing in lower or higher-order goods. Any increased investment must be made in the higher-order goods...

Why is this true?
Couldn't one invest in lower-order goods such as autos or real estate? Have I totally misinterpreted this?

If need more context to answer this, please let me know because this is sticking in my craw. Thanks for your help!

 

[Conza88]

More context wld be good... like chapter etc... paragraph... lol..

Also you'd be better off posting this q, at mises.org forums

 

[drpiotrowski]

It's in Chapter 1, Endnote 13.


Paragraph:

But, it may be objected, may not credit contraction overcompensate the errors of the boom and itself cause distortions that need correction? It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market. But since contraction causes no positive mal-investments, it will not lead to any painful period of depression and adjustment. If businessmen are misled into thinking that less capital is available for investment than is really the case, no lasting damage in the form of wasted investments will ensue.[13] Furthermore, in the nature of things, credit contraction is severely limited — it cannot progress beyond the extent of the preceding inflation.[14] Credit expansion faces no such limit.

Full Endnote:

Some readers may ask: why doesn't credit contraction lead to malinvestment, by causing overinvestment in lower-order goods and underinvestment in higher-order goods, thus reversing the consequences of credit expansion? The answer stems from the Austrian analysis of the structure of production. There is no arbitrary choice of investing in lower or higher-order goods. Any increased investment must be made in the higher-order goods, must lengthen the structure of production. A decreased amount of investment in the economy simply reduces higher-order capital. Thus, credit contraction will cause not excess of investment in the lower orders, but simply a shorter structure than would otherwise have been established.

Hopefully I can get some insight here. I'll try it over at the mises forum, too. Thanks!

 

[forsmant]

Automobiles losse value over time as they get crappier. Investing in a fleet of vehicles for your business puts the vehicles into higher order goods, they become tools. Real estate can be a higher order good too as you always need a place to produce.

 

[eric_cartman]

this is what i think about that statement:

if someone saves money... these savings become capital that can be used for investments.

and if someone is saving money, that means that they choose to not consume goods in the present, and instead choose to save and invest the money so that more goods can be consumed in the future. saving money means delaying present consumption in return for greater future consumption. so the person will not be using that money to consume the lower order goods in the present... but he is instead saving that money so that he will be able to consume a greater amount of lower order goods in the future. and the only way that more lower order can be produced, is to invest in higher order capital goods. because a present investment in higher order capital goods, will lead to a greater amount of lower order capital goods in the future. therefore, when someone saves money, that money must go towards the higher order goods, to ensure that there will be enough resources to produce the lower order capital goods that will be desired in the future.

i hope that makes sense.

 

[Paulitician]

Rothbard is making the point that a credit contraction does not work in reverse of credit expansion. In a credit expansion, investments are made in higher order goods--that is, goods that actually help produce lower-ordered goods (consumer goods being the lowest-ordered good if I remember correctly). And the real problem is that there is an overinvestment in these higher order goods than there needs to be. (However, let me state that there is no such thing as investing "too much"; that's why the "overinvestment" is more aptly called "malinvestment" by Mises.) Though a credit contraction is the opposite of a credit expansion, it is a fallacy to then conclude that it must mean lower-ordered goods are being in invested in than higher-order goods.

Do you understand what Austrians mean by "the structure of production"? Because if you do, you should easily understand Rothbard's point. If you have any more questions just ask.

forsmant makes a good point: certain autos and real-estate aren't investments, they're liabilities. So you might be confusing the terminology here.

 

[drpiotrowski]

Rothbard is making the point that a credit contraction does not work in reverse of credit expansion. In a credit expansion, investments are made in higher order goods--that is, goods that actually help produce lower-ordered goods (consumer goods being the lowest-ordered good if I remember correctly). And the real problem is that there is an overinvestment in these higher order goods than there needs to be. (However, let me state that there is no such thing as investing "too much"; that's why the "overinvestment" is more aptly called "malinvestment" by Mises.) Though a credit contraction is the opposite of a credit expansion, it is a fallacy to then conclude that it must mean lower-ordered goods are being in invested in than higher-order goods.

Do you understand what Austrians mean by "the structure of production"? Because if you do, you should easily understand Rothbard's point. If you have any more questions just ask.

forsmant makes a good point: certain autos and real-estate aren't investments, they're liabilities. So you might be confusing the terminology here.

Thank you! This makes perfect sense and helps clear things up. And thanks everyone else, too, for lending me some insight.

To tell the truth, I was curious what "structure of production" meant. After being unable to determine this, I kind of just assumed that a shorter "structure of production" meant less capital while a longer "structure of production" meant more capital.

What does he mean by "structure of production," though?

Thanks again for all your help, everyone!

 

[Paulitician]

It's simply the production process (the various stages, factors and such) through time. Rothbard basically explains it in that chapter. An easy way to learn more about the structure of production and its relation to the business cycle if you want to is by listening to lectures from mises.org or fee.org. Or you might want to read Rothbard's Man, Economy & State or Hayek's Prices and Production if you really want to get into it but that's pretty meaty stuff.