Reply To: Full Employment, Cycles, Etc


The most volatile sectors of the economy over the boom-bust cycle tend to be higher-order capital goods, mining and other extraction industries, for example. Prices of basic commodities vary more than basic consumer goods.

The reason is that demand for raw materials increases disproportionately to the increases in demand for lower-order goods. Consider the following stylistic example. Suppose cheap credit during the boom stimulates demand for cars, which then increases demand for steel, which in turn increases demand for iron. Additionally, however, cheap credit makes the production of new auto factories and steel factories viable. But to produce more cars and more factories increases the demand for steel which increases the demand for iron. Finally, the demand for iron to produce non-steel products may also be increasing, or at least not decreasing.

Of course, this is just a general tendency, one might find that cheap credit increases the demand for a particular consumer goods and thus it’s production more dramatically than the production of some unrelated higher-order good.

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