Reply To: Rothbard and Hayek

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#17034
jmherbener
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The Hayekian triangle is a pedagogical devise used to illustrate certain features of an economy’s capital structure. It’s pictured as a right triangle with an acute angle on the far left of its base and the right angle on the far right of its base. Its height is the value of consumer goods produced in the economy. As production moves through each stage, one moves from the left to the right accumulating value. The first stage of production is extracting raw materials, the second stage is producing primitive capital goods, the later stages are producing sophisticated capital goods. For example, iron is mined, refined, made into steel, the steel is formed into fenders for a car, then the car is assembled. At each stage value is being added and the extra value (i.e., the difference between buying prices of inputs and selling prices of outputs) is the interest rate when the economy is in equilibrium. So the “slope” of the hypotenuse is the rate of interest.

Rothbard improved on the triangle with the trapezoids he uses the depict the capital structure of the economy in his book, Man, Economy, and State. These devises are useful in analyzing the dynamics of a market economy. For example, how do production processes change through the capital structure if people’s time preferences decline (the slope of the hypotenuse flattens) or if the state generates monetary inflation and credit expansion.

Check out Chs. 5 and 6 of Rothbard’s book:

http://library.mises.org/books/Murray%20N%20Rothbard/Man,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf

I think your suggestion about studying Hayek is wise. Learn about Austrian economics from Rothbard and Mises and then tackle Hayek.

To get an idea of Hayek’s contributions to Austrian economics as such, you might take a look at Joe Salerno’s introduction to Prices and Production and Other Essays.

http://mises.org/books/hayekcollection.pdf