Essay:Stuff Business Cycle Theory
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People produce stuff. There are many different types of stuff, which are not freely interchangeable, but let's keep it simple, and call it stuff.
So what is this stuff for? Why do we make it?
First off, we want to consume some of the stuff. We have to eat something, we have to live somewhere and we want that life to be good. To that effect, we need a lot of stuff, from food to computers to read articles on the Internet — to cover all the essential needs.
But to make all this stuff, you need to expend quite a lot effort — and a lot more stuff. The people making the stuff also need to be taken care of. To build those complicated things, you need parts and raw materials, you need factories and mines and all the infrastructure around, and you need shops and a lot more to get the stuff to the consumers. To maintain a certain structure of consumption, you need a massive structure of production - the difference between the visible part of the iceberg and what lies below. It needs to be built and then kept in shape. (I, Pencil is but one illustration of it.)
All this effort and stuff needs to be expended just to stay in one place, without changing anything.
But we don't like to stay in one place, we want to have a better life, make the world a better place, achieve more - or simply change our taste now and then.
To do this, to change the structure of production, requires more effort and more stuff. It has to come from somewhere. And no matter how you turn it (using your own stuff, somebody lending you theirs, or giving you a gift), some people have to sacrifice part of their lifestyles, and effort and stuff have to be invested. We may be better off tomorrow - and we hope so - but today we will have to do with less.
Assuming those investments work out, the production structure will be upgraded and produce more (better, different) stuff. That means you can enjoy it more in consumption, invest it to produce more, or do some of both. This is that famed "natural growth". And it takes time.
If it comes to the business cycle, people mostly look at the bust - businesses crashing, unemployment, an overall slump in production and standards of living. The Austrian Business Cycle Theory explains this with the practice of Fractional reserve banking and the expansion of credit, the lowering of interest rates, which misinforms entrepreneurs into wrong investments lines. In the boom, we waste a lot of stuff on things we can't really afford yet.
Some critics(1)(2) argue, that this cannot be the case, because if people are investing too much, shouldn't they also be forced to limit their consumption? A boom is characterized by an increase in investment AND consumption, after all.
So what is wrong about the boom? What can be wrong about having more stuff?
To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they
a) miraculously have more stuff from somewhere, or
b) they forgot something
What is often overlooked, is the existing structure of production the boom is supposed to run on. If it was a house, it would be like starting to build an additional story or five on it, moving more people to live inside and perhaps building a factory on the top of it... ignoring any structural supports and foundations. Since there isn't really more stuff around, the new projects can't be finished, or run effectively — at least not without affecting the existing functions of the house. And since much of the construction material is torn out of the existing structure, the house might just collapse one day and bury all those enthusiastic builders.
A lot of stuff will be wasted. Worse yet, you will need more stuff and effort just to rebuild the original structure.
And that is what happens in the bust.