Is history repeating itself? Two dimensions of the market

He who does not learn from history is doomed to repeat it. Are we going through a punishment of repetition in today's crisis? And will we learn?

Hayek's triangle
Hayek's triangle

You ask, what's in the first picture? This is a concept invented by FA Hayek - he is also named after him, but it is true that he was not the very first "triangle" - he is only the best known.

Two dimensions of the market

The market is a two-dimensional environment. What? What market dimensions?

The first dimension of the market is space. This dimension of the market is studied very carefully - from the ground up it is de facto the accumulation of capital in the form of "here and there", in one period of time.

The spatial dimension of the market is relatively easy to imagine - you as a consumer choose between rolls and instant soups. Your decision will be influenced by your preferences, motivation and price. You choose what is best for you personally subjectively.

The second dimension of the market is time. This dimension of the market is studied somewhat and is not taken into account by a large number of economists. I, too, did this until recently. However, I am not an economist.

Let's go back to the example with a croissant and instant soup. Let's say soup is more expensive than croissants. But now you have nominally more money (now it doesn't matter for what reason), so you buy that soup. If he has more money with you and many other people who start buying soups in bulk, a long and complicated process will begin. changes in capital structure. And here comes Hayek's triangle.

Hayek's triangle - individual stages of production

At that moment, the demand for instant soups will start to grow - retailers will start to demand more soups from wholesalers, wholesalers will start to demand more soups in distribution, while those in production will start to demand more soup ingredients. On the contrary, the demand for rolls has fallen - retailers will order smaller quantities of rolls from wholesalers, those from distribution and so on.

As a result, the value of the soups produced increases, while the value of the rolls produced decreases.

We can see from the picture that the most distant consumer is the "extraction of raw materials", the output from this phase then passes into processing… and so on. In the meantime, however, it is still flowing time.

Civilization development and capital accumulation

The development of society, ie the process of civilization, is based on two basic pillars - division of labor a accumulation of capital. However, the accumulation of capital takes place not only in space, but also in time. Over time, capital accumulates by saving people (for something), thereby reducing their current consumption.

When people save and thus reduce their current consumption, the final value of the consumer goods produced is lower. At the same time, however, they are expanding loan funds (more about them in the article Impacts of higher taxes), ie investors have more money to invest, banks lend more. Investments in more capital-intensive stages of production are expanding, ie innovations are taking place in those that are more distant from final consumption in our triangle. The triangle is flat.

Hayek's triangle - reduction of time preferences
Hayek's triangle - reduction of time preferences

Here you need to realize that the total value of expenditure is the same, only their structure changes. Through prices, the market mechanism transmits information to entrepreneurs, who change the structure of their investments (there is a shift in production factors) and the production structure thus adapts to the changed demand structure.

It follows that Entrepreneurs are vitally dependent on the quality of informationwhich are transmitted through prices.

Loan funds

What affects how many people will save? So what affects the size of loan funds?

It is the interest rate - the amount of appreciation of the money saved. The higher the interest rate, the more people will save and at the same time reduce their current consumption, because people will benefit more from the money saved. The opposite is also true - the lower the interest rate, the less people will save, the higher the current consumption. However - as we have shown above - higher consumption does not necessarily lead to economic growth.

Economic growth in the Hayek triangle
Economic growth in the Hayek triangle

When people will start saving more and, as you can see above, will start investing in new stages of production, which in time will mean that in the future the amount of both capital and consumer goods will increase. That is economic growth.

Next time

In this article, we shed light on the basic theory surrounding the Austrian concept of "capital macroeconomics," the Hayek triangle. Next time article we will apply this to today's crisis and look at its real causes.