Visualizing The Boom-Bust Cycle with Roger Garrison
Summary
Austrian Business Cycle: The episode explains Roger Garrison’s capital-based macro framework, integrating time and money to interpret booms and busts.
Loanable Funds: Credit expansion shifts the supply of loanable funds, pushing rates below the natural level and creating a savings-investment mismatch.
PPF Dynamics: The economy can temporarily move beyond the sustainable frontier, boosting both consumption and investment, before falling below it as imbalances surface.
Capital Structure: The Hayekian triangle shows a reallocation toward earlier production stages and higher current consumption, setting up future malinvestment and shortages.
Policy Contrast: The Austrian view is contrasted with Keynesians (demand fixes) and Monetarists/Chicago school (no macro problems), positioning Austrians in the middle.
Investment Implication: Artificially low interest rates distort price signals and risk an unsustainable boom that ends in a corrective bust, warranting caution toward policy-driven cycles.
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action podcast. Today I am going to walk through a famous diagram that Roger Garrison developed. And the unfortunate backstory here is is Roger Garen uh recently passed away. And so I'm taking this episode of the Human Action Podcast to commemorate some of his contributions. And Roger was a uh a macroeconomist and what he is known for. This might sound funny if you haven't seen them, but his PowerPoint presentations were absolutely amazing. He did things with a PowerPoint you didn't realize could be done. And it was also surprising because, you know, when when we first saw him given these things, he was already at that point a middle-aged man at the at the very least. And so, you weren't you weren't expecting that. You'd expect some whiz kid who was 22 to come in. And no, it was it was Roger Garrison. Um, so with the limited time we have here, there's there's a lot we could tackle. Let me just I think um to be succinct here, I'll just flash up one of his famous diagrams and just walk through ho how this thing works because he really compresses or distills the messian theory of the boom bust into a few diagrams. And particularly what Roger did was he translated what you might call the Mises Hayek theory of the business cycle into the language of modern macroeconomists like using as we'll see in a second here two diagrams that are quite familiar to anybody who's taken a regular college uh class in macro and you know and Roger was able to kind of translate the the Misa's story into that framework. Um, I should mention that on that front, Joe Serno wrote a piece at mises.org just, you know, commemorating Roger and he said in there that the thing that Roger had done and it was an inspiration for the people of his generation was um at the South Royaltton conference where it was um you know some some heavy hitters were there lecturing and Joe is saying that you know as a younger economist you know interested in the Austrian tradition it was a bit intimidating and that um Roger showed that he he did this, you know, the version that he did at that point. It involved the Keynesian cross and showed the inter relationship with certain things in and illustrating the Austrian theory of the boom bus cycle. and Jo I forget his exact wording but he said something like Roger showed us that you could make contributions in Austrian economics building on the work of you know the giants and like you know sort of took the pressure off again that those weren't his exact words but that was the point he was making that you know Rothbird really liked Rogers's uh you know essay where he's he spelled this stuff out I think Roger was only a master's student when he first had this idea to do a sort of graphical exposition of the messian theory. Um, and so and Joe says that oh yeah, that kind of like gave us permission that yeah, there's still work to be done here, but don't think you got to come up with like a new theory of the business cycle. You can you're allowed to just take what Mises gave us and have different ways of illustrating it and so forth. Okay. So, having said that, let me just read to you. I I don't want to merely give the impression that Roger was a popularizer, like a secondhander. that's that's not fair to him and that's not what what he was. um he was a very sharp guy and he has in the journal of macroeconomics so it's the 1984 spring of 1984 volume six issue too if you want to look it up but the title was time and money colon the universals of macroeconomic theorizing and then later Roger has a book from the in the Routtledge series called time and money and that's where he really lays out all of his views but let me just read the abstract of this because this is a great way of crystallizing Roger's approach and how he would try to communicate to the mainstream and explain this is why the Austrian perspective is important in developing what Roger would come to call capital-based macroeconomics. Right? So he didn't call it Austrian. He was trying to come up with language that was more substantive in terms of explaining this is the content of what it is that we're doing and why are we different and he said oh what we're doing is capital-based macroeconomics and so here let me read this abstract of his 1984 piece a broad overview of the macroeconomic literature suggests that two objects of economizing behavior time and money are the universals or common denominators of macroeconomic theory explicit recognition of these universals allows for are a fruitful comparison of Keynesians and monitorists. The former tend to deny the possibility of a market solution to macroeconomic problems while the latter tend to deny the problems themselves. So again, he's saying Keynesians tend to deny the possibility that markets can solve macroeconomic problems. Like you could be stuck in a rut of uh you know high involuntary unemployment for years at a time and market forces aren't going to fix that according to the Keynesians. Whereas the monitorists he's saying tend to deny that there's any such thing as a macroeconomic problem. Okay. And let me just make sure you understand like what does that mean? Because Rogers writing this in 1984. So at this point there had been the rational expectations u revolution like Robert Lucas and Milton Friedman had written their critiques of orthodox you might say hydraulic Keynesianism as it had rained in the 50s and 60s and the stagflation of the 70s was like an empirical black eye for the Keynesians because according to at least the crude versions of their framework policy makers were supposed to choose between high unemployment or high inflation but not both at the same time. That that should have been impossible. Like if the economy is overheating, you're going to have high inflation but low unemployment at least, right? And no, the 70s showed you could have both at the same time and that shouldn't have been happening. Whereas what the Chicago school monitorrist folks had been saying could totally explain all that. Okay. But then if if the monitorrist/ Chicago school, you know, efficient markets guys, I'm kind of lumping them all together. If they were right in their critique of the Keynesians, what do they offer instead? And they had what's called real business cycle theory or RBC. And so the idea was just very briefly, um, we don't have perfect information. And so there there are shocks that happen, right? like labor productivity might change or you might have a the crop failure and so forth. The shocks can hit the economy and it's when you you know model it correctly even with everybody being completely rational um even if everyone understands the uh you know the the the mean and standard deviation of the shocks and all this stuff. Still, it you can build models in which when there's like a negative shock to labor productivity, the optimal thing to do is for people to not sell as much of their labor, to wait for conditions to change until labor is more productive and then it makes sense to work more. All right? And so they consume more leisure during these periods like right after an unusually high shock to labor productivity. Okay? Okay, so you can build little models where everything all the bells and whistles, everybody's rational, blah blah blah, and these shocks can happen and then you get up high unemployment. And so the point is in those models, there's nothing for policy makers to do. It's like, yeah, unemployment's high, but that's the correct thing given the fundamentals, right? And so that's what what Roger is referring to there where he's saying the monitorists tend to deny the problems all them themselves. Okay. So then what do the Austrians do? Austrian macroeconomics which consists of an integration of capital theory and monetary theory and lies between these two extreme positions is used to assess recent developments in the mainstreams of macroeconomics. Okay. So big picture um the Keynesians Roger saying tend to think it's all about money and demand right that oh if there's a recession it's because people aren't spending enough let's just lower interest rates. If that doesn't do the trick, have the government come in and run big budget deficits, spend more than they tax. That'll boost demand. That'll fix things. Don't worry about uh you know the fundamentals or well gee are you know is the workforce adequately equipped to produce the things the consumers you don't worry about that stuff. Is there a problem with the capital structure? What are we talking about? We don't have any of those in our models. Just go ahead just boost spending. On the flip side, the monitorists as of 1984, Roger was saying say yes, spending has nothing to do with it. Money's neutral. You know, you don't even need money in our models. Like everyone could just do everything with contracts and whatnot. And just adding money is just going to make prices go up. That's not going to fix anything. Unions would just adjust their wage demands. Money does nothing. If there's a problem, it's because the fundamentals are wrong. There was a shock. policy makers can't make labor more productive just by spending money or whatever. So no, just sit back and the market will fix itself as you know the shock subsides. And then Garrison saying the Austrians are in between those two extremes. And so spec specifically he's saying because in the Austrian theory of the business cycle there's a monetary cause of the boom but then there are real male investments that are made. Okay. So once there's a crisis, you can't fix it by injecting more money because there actually have been genuine male investments. The real structure of production is out of whack and you can't fix that by deficit spending or running the printing press. However, money is involved because when you say how did the economy get into this position in the first place, it's because earlier there had been injections of bank credit that were not supported by genuine savings. Okay, so that's the sense in which Roger says the Austrians combine the best of both worlds that they do involve money and capital. And so we'll see capital in a sense captures the flow of time that you need to tell a story of how the capital structure could get out of whack. You need to have a model where things happen over time. It's not just a static snapshot where oh gez aggreate demand is insufficient for full employment the way like a Keynesian would would try to depict that. Okay. So anyway, that's what he's getting at there. And so with that preface, let me now walk you through. So here this diagram is coming from I grabbed it from it's chapter nine the title which is the Austrian school colon capital-based macroeconomics and so it was Roger's chapter in the book modern macroeconomics colon its origins development and current state which was in published by uh Elgar in 2005 the editors of this were Brian Snowden and Howard Bain. Okay, so there's different versions of this. And I'll put links in the show show notes page, folks. If you really want to see it, just go, you can either get the PowerPoint yourself or watch video of Roger presenting at one of the Mises Universities of him going through his PowerPoint. And specifically, what you want to see is first have him walk through his diagrams or his PowerPoint animations showing a sustainable expansion, right? where the households voluntarily save more. That provides more loanable funds that pushes down the equilibrium natural rate of interest. At the lower rate of interest, earlier projects that are further from consumption become profitable. So businesses invest in those what's called higher order stages. The entire production structure. It gets lengthened and and and initially it's not as tall. these these phrases will mean more as we go through this. But then the economy grows faster, right? With a higher savings rate, real GDP growth every period is higher than it otherwise would have been. Okay? And so there's nothing unsustainable about that. That's fine. Like the increase in the production of investment goods is counterbalanced by a decrease at least in the short run of the consumption of or the production of consumption goods. Okay. What we're going to now go through is what happens when there's an unsustainable boom that's policy induced. And so the idea is here we're going to see in Roger's diagrammatic framework what happens when things go wrong. But again, it's it's important to first understand what does it look like when things go right. But we don't have time to do that right now. Okay. So having gone through all that, let me now walk you through this diagram. Okay. So, we're going to start on the bottom right, then move up, and then move left. All right. In the bottom right, that is a standard diagram from regular textbooks. It's called the loanable funds. And the idea is that oh, on the y-axis, you got the interest rate and on the x-axis you've got saving, comma, investment. That's what the S comma i stands for. And the idea is um you could draw a supply curve which is saving right the supply of savings and the demand curve which is investment right so the saving of loanable or the supply of loanable funds means people who are saving and then bringing funds to this market to lend out whereas what's the demand for loanable funds oh it's businesses who want to invest you could also um include in this like people who want to borrow for consumption purposes like like people want to put a vacation on their credit card or something they might be more willing to do that or go on a fancier vacation if interest rates are lower but here Roger's just focusing on the investment component of the demand for loanable funds. Okay. So, the idea is originally with the original saving and or supply and demand curve, you got that intersection at the uh black circle. By the way, I didn't say this at the beginning. For this episode, you're going to be want to watching the video. Otherwise, this isn't going to make much sense to you. So, if you're at the gym, good for you. Keep it up. Don't cut it short. But when you get home, pull up the video and watch it there. Okay. So at that black circle that's the intersection of this the original supply and demand curve. And so that is the equilibrium or what we call the natural interest rate. That's what the interest rate should be that reflects the fundamentals in this economy. And so then what you do is you move upward and that top right diagram is what's called a production possibilities frontier or a ppf. Again this is a standard thing in introductory textbooks. And what this shows is the tradeoff physically between producing two different kinds of goods. So historically you might have put guns and butter to be the two axes right to kind so the trade-off if the economy wants to produce more goods for the consumers which is represented by butter you can do that or you can say oh what if we want to produce more military hardware and that's guns. Okay. So here the trade-off that Roger is depicting is between consumption goods or consumer goods and investment goods. Okay. And so consumer goods are things like television sets, sports cars, you know, fancy designer clothes, happy meals at McDonald's, right? Things that are the end state. That's the finished good. Could also be services, you know, like getting a massage or something. All right. So things that bring immediate happiness or utility to the consu to the user. In contrast, investment goods are things like hammers and drills and 18-wheelers and telescopes and factories, right? Things like that, right? So there's they're goods, but they don't provide direct enjoyment. They're just tools and equipment that augment productivity so that we can have more consumer goods down the road. Okay. So the idea is what that black semicircle is showing is the production possibilities frontier. So it's saying when the economy is producing at its maximum capacity, there's if we're just, you know, grouping it in terms of a total output of consumer goods and investment goods and we're just having two numbers to represent that, there's a trade-off. If you want to produce more TVs, you got to produce fewer hammers at any given time, right? Or if you want to produce more schools, then you got to produce fewer movie theaters. Okay? And the this the slope of that the reason it's not just a straight line is the idea is that there's diminishing margin of returns right so making the first like right now if we you know we're at some mid midpoint on that curve and you say let's produce um I'm willing to not produce a 100 television sets how many more hammers can we make and there you might be able to make a lot more but then if you keep doing that and you keep saying only produce a 100 fewer television sets 100 fewer 100 fewer, how many more hammers? It's some point that trade-off goes against you. That for every television set you're willing to give up, the amount of more hammers you can make goes down because you start hitting limits in terms of there's certain key inputs that are, you know, you need for hammers or whatever. And after a while, you start running low on that stuff. Okay. So that's that's why that thing isn't just a straight line, but it's got that curve that at some point again you got to start giving up more and more consumption to get a given increment investment goods or vice versa. Okay. So the idea is Roger has calibrated these diagrams so they line up so that originally at the equilibrium natural rate of interest you get that's where the supply of savings equals the demand for savings and so that's the amount you know lent and borrowed and then that you go upwards and so notice oh the the right displacement right like where that is on the x- axis lines up with that top right diagram and that makes sense because that's showing how many investment goods the economy is producing. Okay, so that's where he I mean you have to choose the units properly, but that's that's what Roger's trying to show there. Okay. And then just given whatever that point is on the production possibilities frontier, you would then move to the left and then on that y ais that vertical height shows how many consumption goods are getting produced right now. The snapshot in time. Okay. So now follow that dotted line over to the left diagram and that's hitting the triangle that's like the original triangle, right? So if you're looking at that those there's like three triangles you're looking at there. Look at the one that has no dotted lines involved. That's the original sustainable status quo. Right? This is the original equilibrium that is sustainable where we have the natural rate of interest everything dovetales with the fundamentals. So on that triangle that's doesn't involve dotted lines the height of that triangle corresponds to the amount of consumption goods that are being produced. Right? That's why that dotted line lines up with the black point on the production possibilities frontier. And so what this is showing is this is what's called a the hyakian triangle and it is showing the time structure of production. So the idea is if on the left side like where the triangle starts again we're just looking at the one that is just composed of solid lines. Um that's the earliest stage that's things like mining. All right. And then as you move, so time is the x- axis on this triangle. And so as you move to the right, it's like the goods are flowing through the production pipeline over time. So early stages like mining, as you move to the right, now you're into um you call it refining. You move more, now you're in manufacturing. You move more, now you're in wholesale. And you keep moving and now you're retail, right? Or if you want to do like an agricultural interpretation, the very first stage is harvesting the wheat out of the ground. Then the next, you know, you keep moving to the right. Now this it's uh grinding the wheat into flour. Then you keep moving and then oh, you take the wheat and mix it with water and stuff and put it in ovens and bake it. And then you move to the right some more. And now someone takes those loaves and slices them and puts them in packaging. and then someone puts them on a truck and they end up finally at the grocery store. Okay? And so the idea is the increase, you know, as you're moving along the hypotenuse of that triangle, that's showing the increase in the market value of those goods in process as they move from the early distant higher stages of production to the lower, you know, first order stage which is consumption. Okay? And so the market value increases over time, right? that when you first harvest the wheat that's got a certain market price, you sell it to the next stage. That person then combines it with other inputs now has a bunch of flour and sells it. So the total market value of the flower is higher than what was the, you know, the market value of the original wheat. It would have to be, right? Because each stage there has to be a markup if you want to use that language to get people to be in that stage in the first place, right? You buy your inputs at a certain price. You add some more. You you pay some more money to invest more resources into it, including labor. And then you sell the product next period to the next guy in the chain. There has to be a markup there. Otherwise, why are you doing it? Okay. And that that markup each at each stage corresponds to the market rate of interest. Okay? So it's not jumping out at you here in this diagram, but the idea is the slope of that triangle corresponds to the original height of that equilibrium interest rate. Okay, that the lower the interest rate, the less markup you need period to period as as the goods and process go from one stage to the next. as they move rightward on that diagram, the slope of the hypotenuse of that triangle can be more shallow because the interest rates lower. Okay. All right. And so, and then the idea is again that when things are in a long run stable equilibrium where everything's consistent with the fundamentals, the market value of those goods and process rises over time. Strictly speaking, it should be a curve for because it's exponential growth. But Roger just says keep it, make it a straight line just for simplicity sake. And then it finally, you know, when it finally hits the retail sale to the final consumer is the height of that triangle, you know, when it finally gets to the rightmost point there. And then again that you you draw you know the dotted line to the right to connect to the ppf and that should correspond to the y ais on the ppf that height because that's how many consumer goods are being produced right okay like so that would be loaves of bread or something in our example okay so I just walked you through what the diagrams are and I and I highlighted the original sustainable equilibrium natural values for everything. So now the question is what would happen if for some reason interest rates got pushed down? So I like I said if you really have the time to do it and get into it first what you want to do is see how Roger moves the you know makes these diagrams respond when the reason interest rates fall is because there's genuine saving right if if time preferences have fallen and people become more farsighted and they're willing to save a higher fraction of their current income then you get a lot of these same effects but it's sustainable there's no problem but Here we're going to ask a different question. We're going to say what if the reason interest rates fall is because either the central bank or just the commercial banks themselves just engage in what's called credit expansion. They just expand the quantity of loanable funds even though the households are actually having saved more. Okay? So you can just think of it as the Fed printing up more money. But it doesn't need to be the you know the Fed actually doesn't have to doesn't even have to be a central bank. But I'm kind of going a field here. Let's just imagine the Fed injects more money and that's now why um the supply of loanable funds shifts to the right. So that pushes down interest rates, right? So you say, "Oh, the Fed cut rates." Oh, that's great. Good for them. That's going to help the economy, right? So what happens? So again, now we're looking at at the bottom right diagram again, right? So that saving that original supply curve of loanable funds shifts to the right because now you see it's oh, it's the original household saving, but now it's plus credit expansion. So that horizontal rightward shift corresponds to the quantity of new loanable funds that were injected into the system. So now at any given interest rate more funds are being offered on the loan market. So given the original demand curve, right, the fact that the banks printed up more money to lend, that doesn't change the fundamentals of the households or the businesses, excuse me, and how much they want to borrow and invest. So that demand curve stays the same. So now given that the supply curve shifted to the right, the new interest rate that equilibrates them is that lower I prime. Right? So you you know with the with this supply curve pushed to the right now it intersects at that lower point. All right that's depicted by an open circle. However at that lower interest rate the I prime. Now you can say how much are the households saving and you can see oh it's not the original amount it's a it's a lower amount right because now at a lower interest rate on that original savings curve you're at the open circle there all right so the point is at the lower interest rate now businesses want to invest more right because credit is cheaper they're willing to borrow and invest more but households save less Okay, so that mismatch is going to matter. So now you you see that what those two open circles mean on that bottom diagram. Now follow those dotted lines up to the ppf and see what's going on up there. And so what ends up happening is the households because they're saving less that means they're consuming more right out of their given income this period they're going to save less of it. So that means they're going to consume more. And so that open circle when you go upward you see oh that corresponds now to a point that's higher on the consumption and lower on the investment. Right? That in other words that open circle that's on the top left in the ppf diagram that's showing the lower investment that would correspond to how much the households themselves are saving. And so the you know the height on the sea there is showing how much the households are trying to consume. However, we know in practice the businesses are spending a lot more on investment. The businesses are buying more investment goods. And so you can see the other white circle that's on the ppf corresponds to that higher level of investment you know on the bottom diagram there that you know that vertical dotted line. Okay. And so you have this mismatch there where the households are trying to consume with that higher top left open circle. The businesses are trying to buy new investment goods at the um the lower right open circle. And so you but you say okay but in in reality so how where's the economy producing right because it's got to be somewhere. And there Roger showing it. Oh, it's that that top right open circle, right? That's the that's what would be happening if the economy simultaneously satisfied the households who are trying to consume that much and the businesses that are trying to buy that many investment goods, you know, with their with the money they're borrowing. Okay? And so you say, "Wait a thought this was a production possibilities frontier. Doesn't that mean that top right circle is impossible to produce? It's beyond the frontier. I thought by definition the frontier was showing the combination of uh mixtures of consumption and investment goods that are physically possible. And so here you know Roger has an interesting discussion where he says what this strictly speaking is is sustainable combinations of consumer and investment goods. you can briefly move beyond the ppf. And so that's what he's showing there with that like uh curved arrow like that originally moves up towards that white top white circle and then turns around and goes below the ppf. So what he's trying to capture there is to say initially when those in when the you know there's the credit expansion that pushes down interest rates, households try to consume more and save less, businesses want to borrow and invest more, the economy tries to start moving towards that top right circle and it does actually approach it. Right? So the economy in the short run really is making more television sets and hammers. So the households are genuinely consuming more. the businesses really are getting more investment goods that they're buying with the borrowed money, right? It's not it's not merely an illusion. They the households really are getting more TVs. They're going out to dinner more. They're buying more Ferraris. The businesses really are building more factories, getting more 18-wheelers in operation, getting more uh hammers and nails. So, you said, "Well, how's that possible?" Because in a modern complex economy there's lots of things you can do to increase the output of certain sectors by neglecting like the processes that you would need to m to to keep up to keep that output sustainable. All right. So just to give a specific example, let's say you're running, you you step back and you look at the economy as a whole and you say what's the fleet of of shipping that we have like the fleet of trucks, you know, 18 wheelers and all the uh you know, the trailers that they have and and things like that, you know, at any given time, how many do we have? And then you can say, so how much on a given day can, you know, how much cargo can we ship with our trucks? And the idea is if you if you mean by that like what's a a sustainable in the long run volume of shipping that's one answer because at any given time you need some of the fleet to be with the mechanics getting you know their fluids changed and getting the tires rotated etc. Right? So you can't actually, you know, if you got a million trucks in the fleet, it can't be that sustainably you just have a million trucks on the road delivering cargo 24/7. That's unsustainable. If you if you did that, eventually they would start breaking down. So really, you can only have whatever 90% in operation any given time because the rest are getting worked on and the drivers have to sleep and stuff like that, right? So Garrison's saying what ends up happening in this unsustainable thing, the economy temporarily moves off the production possibilities frontier and that's analogous to things like if you just ran the fleet without worrying about maintenance. And yes, you could deliver more Amazon boxes per day for a month or two than before you thought was physically possible because really what you meant was this is how many Amazon boxes we could deliver per day sustainably given the the fleet that we have. But if you're saying no, throw caution to the wind. We want to just like literally how many could we deliver over the next month? That would be a higher number. But then when trucks start breaking down because you didn't change their oil or rotate their tire, whatever, then um the amount of Amazon boxes you can deliver is going to plummet. And notice it's not just going to fall back to the prior status quo. It's going to be even lower because if you haven't been doing maintenance and then all of a sudden trucks start breaking down and then you bring them into the shop, they're going to be tied up for longer than if you had just changed the oil when you were supposed to and that kind of stuff. Okay, so that's what that arrow is trying to capture there. Okay, so now we're on the verge here just wrapping up this discussion. So then how does that fancy footwork on the PPF correspond to the left diagram, the Hakian triangle? So there what Roger is showing is oh it's like the triangle is being pulled in both directions that the consumption one's easier there. As we're getting to the right end of the triangle, the height is getting pulled up because now instead of the consumers only getting that original height of output of consumer goods, they're trying to get, you know, the the top line where they, you know, that top dotted line's hitting. And so it's like the the triangle is getting pulled to be taller. But on the other hand, the this triangle is showing um how much investment is happening at earlier stages. And now because interest rates are lower, the triangle has to have a more shallow slope to it. And um and we know there's more total investment spending. So the only way to make that work is the triangle, the left end of the triangle point has to move to the left. And so that's why, you know, and then that makes sense too, like there's earlier stages of investment now. Businesses are investing in things that will take longer to reach the final retail market, but that's okay because interest rates are lower, right? So, the time discount on your funds is not as severe as it used to be. And so projects that take longer to bring to market now appear profitable when you're plugging in a lower discount rate to come up with, you know, what's the present discounted value of this whole stream. Okay? And so that's why that triangle is getting pulled to the left. You see, you know, you it would be sustainable to have investment in earlier stages and have a a more shallow slope if you know if that you see where that dotted line goes. If you were willing to tolerate a drop temporarily in consumption or if you wanted to have more consumption, you could. But then you would have to have, you know, a lot of the in earlier investment goods converted, you know, that not rolled over into new investment, but transferred into consumption and the triangle would become steeper. You know, so those are from the different triangles with the dotted lines, but that's not what you you're trying to do it's like you're trying to do two triangles at the same time and so it's getting pulled in both directions and that's unsustainable. So yeah, you can keep doing that for a bit, but what's going to happen then is at some point consuming at that higher rate. Um the the goods flowing, you know, out of the out of the pipeline to be consumed are going to just dry up and you're going to say, "Hey, where are the the you know, the goods in process coming from the earlier stages to to replenish?" and they're not going to be there yet because now too much investment was diverted to earlier stages and there's going to be this gaping hole working its way through the pipeline. So the you know the the problem is or the there's like a pros and cons on the one hand you can get away with it for a bit right so the problem doesn't immediately manifest itself just like yeah if you just start running the trucks 247 you don't engage in maintenance you can deliver more Amazon boxes and for a few weeks it might look like ah there's no there's no downside we're getting more deliveries done everything's fine what's the big deal why weren't we doing this all along but then eventually you will see why you were doing it, why you were were engaging in maintenance. And so that's what happens here. And this is the unsustainable boom, right? So it's again, it's it's not purely an illusion. People really are consuming more. Businesses really are opening up new factories and hiring workers and bidding them away from other lines and real wages are higher, but you're consuming capital, right? You can't keep doing that. It's unsustainable. Okay. So last thing I'll say is again what Roger was trying to do when he was placing it in between those two extremes. The Keynesians can't show this in their models because they don't have a time structure of production. It's just a static thing where it's aggregate you know spending versus aggregate um or aggate demand versus aggate supply and if there's a mismatch there is and so the government just needs to spend more to fill the gap. And the main, you know, the the Chicago school types, the rational expectations, efficient markets guys in their model, everything is so hyperrational and everything's all done that you don't even really need money. And so money, you know, injecting more money is not going to screw anything up because everyone just adjusts. Who cares? And so in their world, the only way you can get a problem with output is if there is some exogenous change to like technology or resources or whatever that humans can't control anyway. Whereas the Austrians, we think, strike the middle balance that's more realistic and robust, where the real world, you need money and prices to coordinate things. People are not as quote rational and don't understand everything the way they do in the Chicago school models. Because in the Chicago school models, again, you wouldn't even need money. If people could do what the agents in the Chicago school models do, there's no role for money. You don't need prices really. But in a model, in a setting where people do need money, that shows how, okay, so if money gets injected in the loan market and makes interest rates artificially low, that screws things up. The market interest rate has a job to do. So if you make it the wrong number, that necessarily screws things up. And then Roger showing what it does screw up. Okay, so thank you, Roger, for the for putting in that framework. Um, like I said, I'll put links here in the show notes page, folks, if you want to see more of that. And, uh, beyond all that, he was he was a funny guy. He was he had a a very rise sense of humor. And, uh, so we'll miss him. And thanks, Roger, for all your contributions. And thank you folks for tuning in. See you next time. Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content like this on misces.org. Heat. Heat. Heat.
Visualizing The Boom-Bust Cycle with Roger Garrison
Summary
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action podcast. Today I am going to walk through a famous diagram that Roger Garrison developed. And the unfortunate backstory here is is Roger Garen uh recently passed away. And so I'm taking this episode of the Human Action Podcast to commemorate some of his contributions. And Roger was a uh a macroeconomist and what he is known for. This might sound funny if you haven't seen them, but his PowerPoint presentations were absolutely amazing. He did things with a PowerPoint you didn't realize could be done. And it was also surprising because, you know, when when we first saw him given these things, he was already at that point a middle-aged man at the at the very least. And so, you weren't you weren't expecting that. You'd expect some whiz kid who was 22 to come in. And no, it was it was Roger Garrison. Um, so with the limited time we have here, there's there's a lot we could tackle. Let me just I think um to be succinct here, I'll just flash up one of his famous diagrams and just walk through ho how this thing works because he really compresses or distills the messian theory of the boom bust into a few diagrams. And particularly what Roger did was he translated what you might call the Mises Hayek theory of the business cycle into the language of modern macroeconomists like using as we'll see in a second here two diagrams that are quite familiar to anybody who's taken a regular college uh class in macro and you know and Roger was able to kind of translate the the Misa's story into that framework. Um, I should mention that on that front, Joe Serno wrote a piece at mises.org just, you know, commemorating Roger and he said in there that the thing that Roger had done and it was an inspiration for the people of his generation was um at the South Royaltton conference where it was um you know some some heavy hitters were there lecturing and Joe is saying that you know as a younger economist you know interested in the Austrian tradition it was a bit intimidating and that um Roger showed that he he did this, you know, the version that he did at that point. It involved the Keynesian cross and showed the inter relationship with certain things in and illustrating the Austrian theory of the boom bus cycle. and Jo I forget his exact wording but he said something like Roger showed us that you could make contributions in Austrian economics building on the work of you know the giants and like you know sort of took the pressure off again that those weren't his exact words but that was the point he was making that you know Rothbird really liked Rogers's uh you know essay where he's he spelled this stuff out I think Roger was only a master's student when he first had this idea to do a sort of graphical exposition of the messian theory. Um, and so and Joe says that oh yeah, that kind of like gave us permission that yeah, there's still work to be done here, but don't think you got to come up with like a new theory of the business cycle. You can you're allowed to just take what Mises gave us and have different ways of illustrating it and so forth. Okay. So, having said that, let me just read to you. I I don't want to merely give the impression that Roger was a popularizer, like a secondhander. that's that's not fair to him and that's not what what he was. um he was a very sharp guy and he has in the journal of macroeconomics so it's the 1984 spring of 1984 volume six issue too if you want to look it up but the title was time and money colon the universals of macroeconomic theorizing and then later Roger has a book from the in the Routtledge series called time and money and that's where he really lays out all of his views but let me just read the abstract of this because this is a great way of crystallizing Roger's approach and how he would try to communicate to the mainstream and explain this is why the Austrian perspective is important in developing what Roger would come to call capital-based macroeconomics. Right? So he didn't call it Austrian. He was trying to come up with language that was more substantive in terms of explaining this is the content of what it is that we're doing and why are we different and he said oh what we're doing is capital-based macroeconomics and so here let me read this abstract of his 1984 piece a broad overview of the macroeconomic literature suggests that two objects of economizing behavior time and money are the universals or common denominators of macroeconomic theory explicit recognition of these universals allows for are a fruitful comparison of Keynesians and monitorists. The former tend to deny the possibility of a market solution to macroeconomic problems while the latter tend to deny the problems themselves. So again, he's saying Keynesians tend to deny the possibility that markets can solve macroeconomic problems. Like you could be stuck in a rut of uh you know high involuntary unemployment for years at a time and market forces aren't going to fix that according to the Keynesians. Whereas the monitorists he's saying tend to deny that there's any such thing as a macroeconomic problem. Okay. And let me just make sure you understand like what does that mean? Because Rogers writing this in 1984. So at this point there had been the rational expectations u revolution like Robert Lucas and Milton Friedman had written their critiques of orthodox you might say hydraulic Keynesianism as it had rained in the 50s and 60s and the stagflation of the 70s was like an empirical black eye for the Keynesians because according to at least the crude versions of their framework policy makers were supposed to choose between high unemployment or high inflation but not both at the same time. That that should have been impossible. Like if the economy is overheating, you're going to have high inflation but low unemployment at least, right? And no, the 70s showed you could have both at the same time and that shouldn't have been happening. Whereas what the Chicago school monitorrist folks had been saying could totally explain all that. Okay. But then if if the monitorrist/ Chicago school, you know, efficient markets guys, I'm kind of lumping them all together. If they were right in their critique of the Keynesians, what do they offer instead? And they had what's called real business cycle theory or RBC. And so the idea was just very briefly, um, we don't have perfect information. And so there there are shocks that happen, right? like labor productivity might change or you might have a the crop failure and so forth. The shocks can hit the economy and it's when you you know model it correctly even with everybody being completely rational um even if everyone understands the uh you know the the the mean and standard deviation of the shocks and all this stuff. Still, it you can build models in which when there's like a negative shock to labor productivity, the optimal thing to do is for people to not sell as much of their labor, to wait for conditions to change until labor is more productive and then it makes sense to work more. All right? And so they consume more leisure during these periods like right after an unusually high shock to labor productivity. Okay? Okay, so you can build little models where everything all the bells and whistles, everybody's rational, blah blah blah, and these shocks can happen and then you get up high unemployment. And so the point is in those models, there's nothing for policy makers to do. It's like, yeah, unemployment's high, but that's the correct thing given the fundamentals, right? And so that's what what Roger is referring to there where he's saying the monitorists tend to deny the problems all them themselves. Okay. So then what do the Austrians do? Austrian macroeconomics which consists of an integration of capital theory and monetary theory and lies between these two extreme positions is used to assess recent developments in the mainstreams of macroeconomics. Okay. So big picture um the Keynesians Roger saying tend to think it's all about money and demand right that oh if there's a recession it's because people aren't spending enough let's just lower interest rates. If that doesn't do the trick, have the government come in and run big budget deficits, spend more than they tax. That'll boost demand. That'll fix things. Don't worry about uh you know the fundamentals or well gee are you know is the workforce adequately equipped to produce the things the consumers you don't worry about that stuff. Is there a problem with the capital structure? What are we talking about? We don't have any of those in our models. Just go ahead just boost spending. On the flip side, the monitorists as of 1984, Roger was saying say yes, spending has nothing to do with it. Money's neutral. You know, you don't even need money in our models. Like everyone could just do everything with contracts and whatnot. And just adding money is just going to make prices go up. That's not going to fix anything. Unions would just adjust their wage demands. Money does nothing. If there's a problem, it's because the fundamentals are wrong. There was a shock. policy makers can't make labor more productive just by spending money or whatever. So no, just sit back and the market will fix itself as you know the shock subsides. And then Garrison saying the Austrians are in between those two extremes. And so spec specifically he's saying because in the Austrian theory of the business cycle there's a monetary cause of the boom but then there are real male investments that are made. Okay. So once there's a crisis, you can't fix it by injecting more money because there actually have been genuine male investments. The real structure of production is out of whack and you can't fix that by deficit spending or running the printing press. However, money is involved because when you say how did the economy get into this position in the first place, it's because earlier there had been injections of bank credit that were not supported by genuine savings. Okay, so that's the sense in which Roger says the Austrians combine the best of both worlds that they do involve money and capital. And so we'll see capital in a sense captures the flow of time that you need to tell a story of how the capital structure could get out of whack. You need to have a model where things happen over time. It's not just a static snapshot where oh gez aggreate demand is insufficient for full employment the way like a Keynesian would would try to depict that. Okay. So anyway, that's what he's getting at there. And so with that preface, let me now walk you through. So here this diagram is coming from I grabbed it from it's chapter nine the title which is the Austrian school colon capital-based macroeconomics and so it was Roger's chapter in the book modern macroeconomics colon its origins development and current state which was in published by uh Elgar in 2005 the editors of this were Brian Snowden and Howard Bain. Okay, so there's different versions of this. And I'll put links in the show show notes page, folks. If you really want to see it, just go, you can either get the PowerPoint yourself or watch video of Roger presenting at one of the Mises Universities of him going through his PowerPoint. And specifically, what you want to see is first have him walk through his diagrams or his PowerPoint animations showing a sustainable expansion, right? where the households voluntarily save more. That provides more loanable funds that pushes down the equilibrium natural rate of interest. At the lower rate of interest, earlier projects that are further from consumption become profitable. So businesses invest in those what's called higher order stages. The entire production structure. It gets lengthened and and and initially it's not as tall. these these phrases will mean more as we go through this. But then the economy grows faster, right? With a higher savings rate, real GDP growth every period is higher than it otherwise would have been. Okay? And so there's nothing unsustainable about that. That's fine. Like the increase in the production of investment goods is counterbalanced by a decrease at least in the short run of the consumption of or the production of consumption goods. Okay. What we're going to now go through is what happens when there's an unsustainable boom that's policy induced. And so the idea is here we're going to see in Roger's diagrammatic framework what happens when things go wrong. But again, it's it's important to first understand what does it look like when things go right. But we don't have time to do that right now. Okay. So having gone through all that, let me now walk you through this diagram. Okay. So, we're going to start on the bottom right, then move up, and then move left. All right. In the bottom right, that is a standard diagram from regular textbooks. It's called the loanable funds. And the idea is that oh, on the y-axis, you got the interest rate and on the x-axis you've got saving, comma, investment. That's what the S comma i stands for. And the idea is um you could draw a supply curve which is saving right the supply of savings and the demand curve which is investment right so the saving of loanable or the supply of loanable funds means people who are saving and then bringing funds to this market to lend out whereas what's the demand for loanable funds oh it's businesses who want to invest you could also um include in this like people who want to borrow for consumption purposes like like people want to put a vacation on their credit card or something they might be more willing to do that or go on a fancier vacation if interest rates are lower but here Roger's just focusing on the investment component of the demand for loanable funds. Okay. So, the idea is originally with the original saving and or supply and demand curve, you got that intersection at the uh black circle. By the way, I didn't say this at the beginning. For this episode, you're going to be want to watching the video. Otherwise, this isn't going to make much sense to you. So, if you're at the gym, good for you. Keep it up. Don't cut it short. But when you get home, pull up the video and watch it there. Okay. So at that black circle that's the intersection of this the original supply and demand curve. And so that is the equilibrium or what we call the natural interest rate. That's what the interest rate should be that reflects the fundamentals in this economy. And so then what you do is you move upward and that top right diagram is what's called a production possibilities frontier or a ppf. Again this is a standard thing in introductory textbooks. And what this shows is the tradeoff physically between producing two different kinds of goods. So historically you might have put guns and butter to be the two axes right to kind so the trade-off if the economy wants to produce more goods for the consumers which is represented by butter you can do that or you can say oh what if we want to produce more military hardware and that's guns. Okay. So here the trade-off that Roger is depicting is between consumption goods or consumer goods and investment goods. Okay. And so consumer goods are things like television sets, sports cars, you know, fancy designer clothes, happy meals at McDonald's, right? Things that are the end state. That's the finished good. Could also be services, you know, like getting a massage or something. All right. So things that bring immediate happiness or utility to the consu to the user. In contrast, investment goods are things like hammers and drills and 18-wheelers and telescopes and factories, right? Things like that, right? So there's they're goods, but they don't provide direct enjoyment. They're just tools and equipment that augment productivity so that we can have more consumer goods down the road. Okay. So the idea is what that black semicircle is showing is the production possibilities frontier. So it's saying when the economy is producing at its maximum capacity, there's if we're just, you know, grouping it in terms of a total output of consumer goods and investment goods and we're just having two numbers to represent that, there's a trade-off. If you want to produce more TVs, you got to produce fewer hammers at any given time, right? Or if you want to produce more schools, then you got to produce fewer movie theaters. Okay? And the this the slope of that the reason it's not just a straight line is the idea is that there's diminishing margin of returns right so making the first like right now if we you know we're at some mid midpoint on that curve and you say let's produce um I'm willing to not produce a 100 television sets how many more hammers can we make and there you might be able to make a lot more but then if you keep doing that and you keep saying only produce a 100 fewer television sets 100 fewer 100 fewer, how many more hammers? It's some point that trade-off goes against you. That for every television set you're willing to give up, the amount of more hammers you can make goes down because you start hitting limits in terms of there's certain key inputs that are, you know, you need for hammers or whatever. And after a while, you start running low on that stuff. Okay. So that's that's why that thing isn't just a straight line, but it's got that curve that at some point again you got to start giving up more and more consumption to get a given increment investment goods or vice versa. Okay. So the idea is Roger has calibrated these diagrams so they line up so that originally at the equilibrium natural rate of interest you get that's where the supply of savings equals the demand for savings and so that's the amount you know lent and borrowed and then that you go upwards and so notice oh the the right displacement right like where that is on the x- axis lines up with that top right diagram and that makes sense because that's showing how many investment goods the economy is producing. Okay, so that's where he I mean you have to choose the units properly, but that's that's what Roger's trying to show there. Okay. And then just given whatever that point is on the production possibilities frontier, you would then move to the left and then on that y ais that vertical height shows how many consumption goods are getting produced right now. The snapshot in time. Okay. So now follow that dotted line over to the left diagram and that's hitting the triangle that's like the original triangle, right? So if you're looking at that those there's like three triangles you're looking at there. Look at the one that has no dotted lines involved. That's the original sustainable status quo. Right? This is the original equilibrium that is sustainable where we have the natural rate of interest everything dovetales with the fundamentals. So on that triangle that's doesn't involve dotted lines the height of that triangle corresponds to the amount of consumption goods that are being produced. Right? That's why that dotted line lines up with the black point on the production possibilities frontier. And so what this is showing is this is what's called a the hyakian triangle and it is showing the time structure of production. So the idea is if on the left side like where the triangle starts again we're just looking at the one that is just composed of solid lines. Um that's the earliest stage that's things like mining. All right. And then as you move, so time is the x- axis on this triangle. And so as you move to the right, it's like the goods are flowing through the production pipeline over time. So early stages like mining, as you move to the right, now you're into um you call it refining. You move more, now you're in manufacturing. You move more, now you're in wholesale. And you keep moving and now you're retail, right? Or if you want to do like an agricultural interpretation, the very first stage is harvesting the wheat out of the ground. Then the next, you know, you keep moving to the right. Now this it's uh grinding the wheat into flour. Then you keep moving and then oh, you take the wheat and mix it with water and stuff and put it in ovens and bake it. And then you move to the right some more. And now someone takes those loaves and slices them and puts them in packaging. and then someone puts them on a truck and they end up finally at the grocery store. Okay? And so the idea is the increase, you know, as you're moving along the hypotenuse of that triangle, that's showing the increase in the market value of those goods in process as they move from the early distant higher stages of production to the lower, you know, first order stage which is consumption. Okay? And so the market value increases over time, right? that when you first harvest the wheat that's got a certain market price, you sell it to the next stage. That person then combines it with other inputs now has a bunch of flour and sells it. So the total market value of the flower is higher than what was the, you know, the market value of the original wheat. It would have to be, right? Because each stage there has to be a markup if you want to use that language to get people to be in that stage in the first place, right? You buy your inputs at a certain price. You add some more. You you pay some more money to invest more resources into it, including labor. And then you sell the product next period to the next guy in the chain. There has to be a markup there. Otherwise, why are you doing it? Okay. And that that markup each at each stage corresponds to the market rate of interest. Okay? So it's not jumping out at you here in this diagram, but the idea is the slope of that triangle corresponds to the original height of that equilibrium interest rate. Okay, that the lower the interest rate, the less markup you need period to period as as the goods and process go from one stage to the next. as they move rightward on that diagram, the slope of the hypotenuse of that triangle can be more shallow because the interest rates lower. Okay. All right. And so, and then the idea is again that when things are in a long run stable equilibrium where everything's consistent with the fundamentals, the market value of those goods and process rises over time. Strictly speaking, it should be a curve for because it's exponential growth. But Roger just says keep it, make it a straight line just for simplicity sake. And then it finally, you know, when it finally hits the retail sale to the final consumer is the height of that triangle, you know, when it finally gets to the rightmost point there. And then again that you you draw you know the dotted line to the right to connect to the ppf and that should correspond to the y ais on the ppf that height because that's how many consumer goods are being produced right okay like so that would be loaves of bread or something in our example okay so I just walked you through what the diagrams are and I and I highlighted the original sustainable equilibrium natural values for everything. So now the question is what would happen if for some reason interest rates got pushed down? So I like I said if you really have the time to do it and get into it first what you want to do is see how Roger moves the you know makes these diagrams respond when the reason interest rates fall is because there's genuine saving right if if time preferences have fallen and people become more farsighted and they're willing to save a higher fraction of their current income then you get a lot of these same effects but it's sustainable there's no problem but Here we're going to ask a different question. We're going to say what if the reason interest rates fall is because either the central bank or just the commercial banks themselves just engage in what's called credit expansion. They just expand the quantity of loanable funds even though the households are actually having saved more. Okay? So you can just think of it as the Fed printing up more money. But it doesn't need to be the you know the Fed actually doesn't have to doesn't even have to be a central bank. But I'm kind of going a field here. Let's just imagine the Fed injects more money and that's now why um the supply of loanable funds shifts to the right. So that pushes down interest rates, right? So you say, "Oh, the Fed cut rates." Oh, that's great. Good for them. That's going to help the economy, right? So what happens? So again, now we're looking at at the bottom right diagram again, right? So that saving that original supply curve of loanable funds shifts to the right because now you see it's oh, it's the original household saving, but now it's plus credit expansion. So that horizontal rightward shift corresponds to the quantity of new loanable funds that were injected into the system. So now at any given interest rate more funds are being offered on the loan market. So given the original demand curve, right, the fact that the banks printed up more money to lend, that doesn't change the fundamentals of the households or the businesses, excuse me, and how much they want to borrow and invest. So that demand curve stays the same. So now given that the supply curve shifted to the right, the new interest rate that equilibrates them is that lower I prime. Right? So you you know with the with this supply curve pushed to the right now it intersects at that lower point. All right that's depicted by an open circle. However at that lower interest rate the I prime. Now you can say how much are the households saving and you can see oh it's not the original amount it's a it's a lower amount right because now at a lower interest rate on that original savings curve you're at the open circle there all right so the point is at the lower interest rate now businesses want to invest more right because credit is cheaper they're willing to borrow and invest more but households save less Okay, so that mismatch is going to matter. So now you you see that what those two open circles mean on that bottom diagram. Now follow those dotted lines up to the ppf and see what's going on up there. And so what ends up happening is the households because they're saving less that means they're consuming more right out of their given income this period they're going to save less of it. So that means they're going to consume more. And so that open circle when you go upward you see oh that corresponds now to a point that's higher on the consumption and lower on the investment. Right? That in other words that open circle that's on the top left in the ppf diagram that's showing the lower investment that would correspond to how much the households themselves are saving. And so the you know the height on the sea there is showing how much the households are trying to consume. However, we know in practice the businesses are spending a lot more on investment. The businesses are buying more investment goods. And so you can see the other white circle that's on the ppf corresponds to that higher level of investment you know on the bottom diagram there that you know that vertical dotted line. Okay. And so you have this mismatch there where the households are trying to consume with that higher top left open circle. The businesses are trying to buy new investment goods at the um the lower right open circle. And so you but you say okay but in in reality so how where's the economy producing right because it's got to be somewhere. And there Roger showing it. Oh, it's that that top right open circle, right? That's the that's what would be happening if the economy simultaneously satisfied the households who are trying to consume that much and the businesses that are trying to buy that many investment goods, you know, with their with the money they're borrowing. Okay? And so you say, "Wait a thought this was a production possibilities frontier. Doesn't that mean that top right circle is impossible to produce? It's beyond the frontier. I thought by definition the frontier was showing the combination of uh mixtures of consumption and investment goods that are physically possible. And so here you know Roger has an interesting discussion where he says what this strictly speaking is is sustainable combinations of consumer and investment goods. you can briefly move beyond the ppf. And so that's what he's showing there with that like uh curved arrow like that originally moves up towards that white top white circle and then turns around and goes below the ppf. So what he's trying to capture there is to say initially when those in when the you know there's the credit expansion that pushes down interest rates, households try to consume more and save less, businesses want to borrow and invest more, the economy tries to start moving towards that top right circle and it does actually approach it. Right? So the economy in the short run really is making more television sets and hammers. So the households are genuinely consuming more. the businesses really are getting more investment goods that they're buying with the borrowed money, right? It's not it's not merely an illusion. They the households really are getting more TVs. They're going out to dinner more. They're buying more Ferraris. The businesses really are building more factories, getting more 18-wheelers in operation, getting more uh hammers and nails. So, you said, "Well, how's that possible?" Because in a modern complex economy there's lots of things you can do to increase the output of certain sectors by neglecting like the processes that you would need to m to to keep up to keep that output sustainable. All right. So just to give a specific example, let's say you're running, you you step back and you look at the economy as a whole and you say what's the fleet of of shipping that we have like the fleet of trucks, you know, 18 wheelers and all the uh you know, the trailers that they have and and things like that, you know, at any given time, how many do we have? And then you can say, so how much on a given day can, you know, how much cargo can we ship with our trucks? And the idea is if you if you mean by that like what's a a sustainable in the long run volume of shipping that's one answer because at any given time you need some of the fleet to be with the mechanics getting you know their fluids changed and getting the tires rotated etc. Right? So you can't actually, you know, if you got a million trucks in the fleet, it can't be that sustainably you just have a million trucks on the road delivering cargo 24/7. That's unsustainable. If you if you did that, eventually they would start breaking down. So really, you can only have whatever 90% in operation any given time because the rest are getting worked on and the drivers have to sleep and stuff like that, right? So Garrison's saying what ends up happening in this unsustainable thing, the economy temporarily moves off the production possibilities frontier and that's analogous to things like if you just ran the fleet without worrying about maintenance. And yes, you could deliver more Amazon boxes per day for a month or two than before you thought was physically possible because really what you meant was this is how many Amazon boxes we could deliver per day sustainably given the the fleet that we have. But if you're saying no, throw caution to the wind. We want to just like literally how many could we deliver over the next month? That would be a higher number. But then when trucks start breaking down because you didn't change their oil or rotate their tire, whatever, then um the amount of Amazon boxes you can deliver is going to plummet. And notice it's not just going to fall back to the prior status quo. It's going to be even lower because if you haven't been doing maintenance and then all of a sudden trucks start breaking down and then you bring them into the shop, they're going to be tied up for longer than if you had just changed the oil when you were supposed to and that kind of stuff. Okay, so that's what that arrow is trying to capture there. Okay, so now we're on the verge here just wrapping up this discussion. So then how does that fancy footwork on the PPF correspond to the left diagram, the Hakian triangle? So there what Roger is showing is oh it's like the triangle is being pulled in both directions that the consumption one's easier there. As we're getting to the right end of the triangle, the height is getting pulled up because now instead of the consumers only getting that original height of output of consumer goods, they're trying to get, you know, the the top line where they, you know, that top dotted line's hitting. And so it's like the the triangle is getting pulled to be taller. But on the other hand, the this triangle is showing um how much investment is happening at earlier stages. And now because interest rates are lower, the triangle has to have a more shallow slope to it. And um and we know there's more total investment spending. So the only way to make that work is the triangle, the left end of the triangle point has to move to the left. And so that's why, you know, and then that makes sense too, like there's earlier stages of investment now. Businesses are investing in things that will take longer to reach the final retail market, but that's okay because interest rates are lower, right? So, the time discount on your funds is not as severe as it used to be. And so projects that take longer to bring to market now appear profitable when you're plugging in a lower discount rate to come up with, you know, what's the present discounted value of this whole stream. Okay? And so that's why that triangle is getting pulled to the left. You see, you know, you it would be sustainable to have investment in earlier stages and have a a more shallow slope if you know if that you see where that dotted line goes. If you were willing to tolerate a drop temporarily in consumption or if you wanted to have more consumption, you could. But then you would have to have, you know, a lot of the in earlier investment goods converted, you know, that not rolled over into new investment, but transferred into consumption and the triangle would become steeper. You know, so those are from the different triangles with the dotted lines, but that's not what you you're trying to do it's like you're trying to do two triangles at the same time and so it's getting pulled in both directions and that's unsustainable. So yeah, you can keep doing that for a bit, but what's going to happen then is at some point consuming at that higher rate. Um the the goods flowing, you know, out of the out of the pipeline to be consumed are going to just dry up and you're going to say, "Hey, where are the the you know, the goods in process coming from the earlier stages to to replenish?" and they're not going to be there yet because now too much investment was diverted to earlier stages and there's going to be this gaping hole working its way through the pipeline. So the you know the the problem is or the there's like a pros and cons on the one hand you can get away with it for a bit right so the problem doesn't immediately manifest itself just like yeah if you just start running the trucks 247 you don't engage in maintenance you can deliver more Amazon boxes and for a few weeks it might look like ah there's no there's no downside we're getting more deliveries done everything's fine what's the big deal why weren't we doing this all along but then eventually you will see why you were doing it, why you were were engaging in maintenance. And so that's what happens here. And this is the unsustainable boom, right? So it's again, it's it's not purely an illusion. People really are consuming more. Businesses really are opening up new factories and hiring workers and bidding them away from other lines and real wages are higher, but you're consuming capital, right? You can't keep doing that. It's unsustainable. Okay. So last thing I'll say is again what Roger was trying to do when he was placing it in between those two extremes. The Keynesians can't show this in their models because they don't have a time structure of production. It's just a static thing where it's aggregate you know spending versus aggregate um or aggate demand versus aggate supply and if there's a mismatch there is and so the government just needs to spend more to fill the gap. And the main, you know, the the Chicago school types, the rational expectations, efficient markets guys in their model, everything is so hyperrational and everything's all done that you don't even really need money. And so money, you know, injecting more money is not going to screw anything up because everyone just adjusts. Who cares? And so in their world, the only way you can get a problem with output is if there is some exogenous change to like technology or resources or whatever that humans can't control anyway. Whereas the Austrians, we think, strike the middle balance that's more realistic and robust, where the real world, you need money and prices to coordinate things. People are not as quote rational and don't understand everything the way they do in the Chicago school models. Because in the Chicago school models, again, you wouldn't even need money. If people could do what the agents in the Chicago school models do, there's no role for money. You don't need prices really. But in a model, in a setting where people do need money, that shows how, okay, so if money gets injected in the loan market and makes interest rates artificially low, that screws things up. The market interest rate has a job to do. So if you make it the wrong number, that necessarily screws things up. And then Roger showing what it does screw up. Okay, so thank you, Roger, for the for putting in that framework. Um, like I said, I'll put links here in the show notes page, folks, if you want to see more of that. And, uh, beyond all that, he was he was a funny guy. He was he had a a very rise sense of humor. And, uh, so we'll miss him. And thanks, Roger, for all your contributions. And thank you folks for tuning in. See you next time. Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content like this on misces.org. Heat. Heat. Heat.