Serious Economics Question

As you know, I\’m not an economist: as you may also have gathered from what I write, I\’m much more interested in micro-economic factors than I am in macro-

Put those two things together and there\’s rather large gaps in what I do know about macro. For example, about the business cycle, the observation that we get expansions and contractions.

Doesn\’t one school of though (Austrian perhaps?) think that it\’s the build up of stocks and inventories and then the slashing of production to ease them that causes (or perhaps makes worse) the downsides of the business cycle?

But if everyone is using just in time delivery, so that there are no (or few) stocks and inventories in the system, then this won\’t happen any more?

Anyone, umm, actually know?

6 thoughts on “Serious Economics Question”

  1. I’m certainly no expert, but I gather that Austrian theory tends to the following :

    1) Money is a way of keeping score of economic activity.

    2)Government turning on the printing presses to fund deficit spending skews the score and causes inflation.

    3)This also leads to investment in things that either a) should not be invested in at all, or b) should not be invested in quite so much, causing a boom. (By investments I mean things like new staff, higher wages, new products as well as the more traditional capital items.)

    4)This goes on until the economy gets so out of kilter that the wheels come off, bust.

    5)The bust is the necessary correction to sort out all the bad investments that happened during the boom.

    An Austrian economist would say that the build up of stocks and inventories are caused by bad investment decisions which are themselves caused and made possible by the over-inflation of the money supply. The cuts in production and stocks are a good thing as they allow the market to correct itself.

    Item (2) above is what leads Austrian economists to go on about hard / metallic currencies as they believe that the money supply is far too important to be left in the hands of politicians.

  2. JIT does imply that there will be fewer stocks. But I think a bigger a factor is that the service sector is bigger than the manufacturing sector these days. Service industries tend not to have inventories of goods manufactured but not yet bought.

  3. I can see that a large stock inventories could prolong a bust as inventories have to be unwound. However, it is the miss-allocation’s of capital in equipment and staff that is the problem.
    Putting it another way, having the capacity to produce 10,000 widgets a day when the market only needs 1,000 – it doesn’t matter how many widgets you have in the storeroom you are still buggered.

  4. Nothing wrong with economic cycles, nobody understands them (even though Kondratiev managed to predict them pretty accurately for the next seventy years after he was murdered) so there’s nothing you can do about them, even if that were necessarily a desirable thing.

    The least-worst thing we could do is have a Property Bubble Tax, that’ll certainly dampen down the wilder and more damaging swings.

  5. Quote: “But if everyone is using just in time delivery, so that there are no (or few) stocks and inventories in the system, then this won’t happen any more?”

    JIT reduces the timelags in the system, so, other things being equal, the cycles will run faster, and potentially at lower amplitude. However, stock of goods for sale is only part of the picture, malinvestment in producer goods is probably more important, and probably is not affected by JIT.

  6. Steve is closest to properly understanding the matter.

    Higher-than-necessary stocks of goods can usually be sold, albeit at lower prices. Or they can be carried until sold, with loss of the interest cost for the period concerned. People hired can be fired and the higher wages earned during the boom replaced by lower ones during “down” times. In each case, losses certainly may occur.
    But the losses, even losses net of previous profits, fall on individuals, most usually on the entrepreneurs engaging risk (in hope of profit) in the first place.

    In general, entrepreneurial mistakes, including those precipitated by “boom” inflation, do not burden society as a whole. Idled machinery can eventually be restored to use. If maintained during idleness, it may yet produce, eventually, what it was expected to yield over the shorter boom time.

    Any mistakes may be called “malinvestment” but the important (from point of view of the “good of society” or of Economics–as a matter of study and understanding) are those, which are “inconvertible.” Expansion involved assets with no (or minimal, such as scrap) value to be recaptured: remote land and improvements, otherwise unusable; specialized machinery (even costly aggregation, of expert and highly specialized workers not easily reassembled even under normalcy). These are true blows against the welfare of society. And it is worth noting that those critical of “sound money” and supportive of expansionist economic policymaking are quick to note that economic miscalculations can be caused by deflation–as though it was an opposite and equal condition. Dissimilarity in inflationary and deflationary miscalculation lies in the fact the former leads to malinvestment, including some inconvertible. But the latter merely leads to failure to make investments. One destroys capital entirely, making society poorer, and decrees time, work, and saving till the original capital condition be re-achieved. Deflation, though, merely meant that, though capital has not been used wisely (profitably to benefit of society), it is yet unused, available and ready to play its part in a more rational period.

    A cynic might be inclined to explain the fondness of politicians for inflation by observing that it’s easy to horn in to get a little piece of something there’s a great deal and an increasing quantity of but that people are more apt to notice and object when the stuff they (the politicians) want is in short and decreasing supply.

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