Professor Herbener, I’m having trouble wrapping my mind around concrete examples of “lengthening the structure of production.” As I understand it (correct me if I’m wrong), when societal time preferences decrease in a free market, consumption expenditure is reduced and resources are shifted to higher stages of production. As a new equilibrium is approached, price spreads between stages of production (interest rates) have decreased and the length of the production structure has increased in order to “absorb” the new savings but ultimately provide for a reduced consumption level. Is this correct and can you give concrete examples of how an entrepreneur might take action, or general changes that occur within an economy, that would constitute a “lengthening of the production structure?” Thank you.
Lengthening the structure of production means adding stages so that it takes more time from the extraction of raw materials to the sale of consumer goods.
Murray Rothbard gave the example of whaling. The primitive production structure of building a canoe and making a spears and killing a whale has a certain number of stages and takes a certain amount of time. Through saving and investing, it can be supplanted with a longer production structure of mining iron, producing steel, building each component part of a whaling boat outfitted with harpoon launchers, building the production processes to produce complementary producer goods (like fuel), assembling the boat, manning the boat and then killing a whale.
The longer production structure is physically more productive. Therefore, even though a smaller portion of income is spend on consumption, standards of living rise through saving and investing.
The process of lengthening the production structure for the entire economy results in thoroughly reconstituting it. Just compare production processes of 1950 to those of 2000 or of 1850 to 1900.
It sounds like my error in thinking, when applied to a modern complex economy, was that I imagined that, in the case of automobile production, there would have to be stages added BEFORE iron ore mining (and I couldn’t imagine what those would have been) when in reality there would be more stages added BETWEEN iron ore mining and final car production. Is this true? Thank you for your thoughtful and thorough responses.