Study Guide to Man, Economy, and State with Power and Market

164 Study Guide to Man, Economy, and State with Power and Market
B. Professor Galbraith and the Sin of Affluence
In the early twentieth century capitalism allegedly
provided too few goods, while the more modern objection
is that it provides superfluous goods (at the expense
of the “public sector”). If, as Galbraith claims, businesses
can simply create wants through seductive advertising,
why do they spend so much money conducting research
on consumer tastes?
11. Binary Intervention: Inflation and Business Cycles
A. Inflation and Credit Expansion
Inflation is any artificial increase in the money supply.
Credit expansion is a particular type of inflation where the
new money enters the economy through the credit market.
All inflation raises prices and distorts the market, but
credit expansions are particularly pernicious as they cause
the boom-bust cycle.
B. Credit Expansion and the Business Cycle
In a credit expansion the government artificially lowers
the interest rate, thereby spurring investment in
higher stages of production. There is a temporary
“boom” period of illusory prosperity. But unlike a genuine
expansion spurred by actual saving, in the case of
credit expansion the capital structure becomes unbalanced
and eventually entrepreneurs realize that their
plans cannot be fulfilled. The “bust” ensues when businesses
discontinue the unprofitable lines and resources
must be reallocated to their proper uses.