Reply To: Business Cycle Questions


2. So specifically why does the structure of production lengthen? I understand that resources are diverted to higher stages of production because the NPV of the projects are now profitable, but what does it mean to lengthen it? Talking about the example, you said resources must be diverted to expand production capacity. So does the lengthening of the capital structure mean to divert resources to projects that will take time, but increase production in the future?

4. For this, I mean would interest rates have to rise for a bust to occur? Could the Federal Reserve (assuming there isn’t too much inflation) be able to hold a certain interest rate down forever (assuming we never get the crack up boom)? If a bust would still occur, how so?

5. After reading Joe’s and Murphy’s article (from 2008), I do have another question, and forgive me if you did say this in one of the lessons (I will go back to watch if you did). It’s about capital consumption. How does it occur under illusory gains? In Murphy’s article (The Importance of Capital Theory), he talked about how resources (labor), in his example of the island, are not put to maintaining capital. In Joe’s article, he said: “On the real side, the increase in the prices and profitability of consumer goods diverts factors from higher stages to consumer goods’ industries, thereby restricting the supply of resources available to add to or even replace the stock of capital goods.” So if entrepreneurs must maintain capital, why aren’t they doing it? And if the supply of resources are being restricted to add or replace capital goods, wouldn’t the prices of capital goods far surpass the industries’ profitability?

Thank you for taking the time to answer my questions. I might be confusing a few things, but I just want to make sure I fully understand how the business cycle works.