I've been reading "Prices & Production and Other Works", the recent compilation edited by Joseph T. Salerno. This book is tough going! It hurts my brain about as much as reading about advanced computer science topics.
I just finished the first essay, "Montetary Theory and the Trade Cycle", which I found to be very interesting. I have been a follower of Austrian economics for some time but I found some fresh insights from reading this essay. Here are some of the things I found especially interesting:
To quote Hayek verbatim:
"The rate of interest at which, in an expanding economy, the amount of new money entering circulation is just sufficient to keep the price level stable, is always LOWER than the rate that would keep the amount of available loan capital equal to the amount simultaneously saved by the public"
See, I told you this was tough going. This is brilliance though. What he's saying is that in a barter economy or an economy with a stable money supply and thus a natural rate of interest, investment by producers causes consumer prices to fall! This is sacrilege to the Keynsians who believe that any fall in the price level is to be avoided at all costs.
To make a concrete example of this I thought of this little anecdote from a barter economy.
There is a brewer who sells his beer at the local pub. He is paid in chickens by the local chicken farmers. 2 pints of beer equals one chicken. The brewer asks the chicken farmers to help him invest in a larger still to make more beer. They will receive 1 chicken in interest for every chicken they give him with which to pay the carpenter and lumberjack to make the still. So the farmers give the brewer a chicken each and their demand for beer at the pub FALLS because they have fewer chickens to spend on consumption. The new production is eventually brought online and because of the greater supply, the price is lowered to 3 pints of beer for one chicken and the investors get 6 pints for each chicken they invested with the brewer. The price of beer falls and the extra production is their to pay the investors, the increased efficiency of the economy is a win win for both. During the period of investment there is a temporary drop in the price of beer and an increase in the price of producer's goods used by the lumberjack and the carpenter.
With fractional reserve banking though, there is no drop in consumer prices as the fractionally lent dollars do not diminish the consumption of the savers.
Maybe this is why rationing programs during wartime can cause such an enormous boom in the productive capacity of industry? The consumer goods market is subdued and capital investment can take place much more efficiently?
I think the practical lesson for the capitalist is to not be fooled by money prices and to instead focus on a lower price target for profitability than the prevailing price or a higher value proposition at the same price. Merely expecting consumption to persist at the same or higher price is being fooled by the monetary expansion taking place in a fractional reserve banking system.