Production & the Market Process

Robert P. MurphyMises AcademyAugust 24, 2011

Lecture 6: 2nd Half of Chapter 8 of Man, Economy, and State

2nd Half ofChapter 8 of MES

I. Review of Original ERE

1. Net Saving & Investment

2. A Changing Economy

3. Capital Consumption

V. Roundabout Processes

VI. Risk vs. Uncertainty

I. Review Original ERE

� Basic Facts

The rate of interest is 5%.There are 6 stages of production.

Every period…

Total Consumption: 100 oz.Total Gross Saving / Gross Investment: 318 oz.Total Gross Income: 418 oz.Total Net Income: 100 oz.Total Net Saving / Net Investment: 0 oz.

II. Net Saving & Investment

Households lower their time preferences. Out of their net income of 100 oz., they now decide to consume only 80 oz. and to save/invest the remaining 20 oz.

Since this is more than necessary to maintain capital structure, it represents net saving/investment.

A. New Facts

The rate of interest must be lower than 5%.There must be more than 6 stages of production.

Every period…

Total Consumption: 80 oz.Total Gross Saving / Gross Investment: 338 oz.Total Gross Income: 418 oz.Total Net Income: Either 100 or 80 oz.Total Net Saving / Net Investment: 20 or 0 oz.

B. A Possible Illustration

C. Effect on Incomes

Since total net income in monetary terms falls, at least some groups (possibly all) will see money incomes (whether interest, rent, or wages) fall.

But in real terms, workers and landowners definitely see an increase in income.

III. A Changing Economy

A progressing economy has rising gross investment (hence positive net investment) and, according to Rothbard and Mises, aggregate net profits.

A retrogressing economy has falling gross investment (net disinvestment) and aggregate net losses.

A stationary economy has stable gross investment (zero net investment) and aggregate profits equal losses. (Note this isn’t ERE.)

IV. Capital Consumption

V. Roundabout Processes

VI. Risk vs. Uncertainty