Wednesday, January 12, 2011

The Hayekian Triangles in Real Time

In the year 2010, the economy remained, for the most part, in the decline phase of the business cycle, as the Federal Reserve did not restart aggressive money printing until November.

For the Austrian school economists, prior to the relaunched money printing, the economic decline was about the shrinking of the capital structure. Prior Fed money printing increased the length of capital projects and distorted the natural (non-interventionist) capital/consumer structure in favor of capital. Once the money printing stopped, the economy started to readjust to the natural capital/consumer structure, and thus a shrinking of the capital structure. Hayek liked to show the capital structure in relation to final consumer goods in the form of triangles.

During a period of increased money flow to the capital goods sector, the base of the capital structure expands and there is more money flow to earlier stages of production. If this additional capital flow is caused by Fed money printing, which is then stopped, the overall base of the capital structure will shrink, when that money flow stops. Along with a shrinkage of early stage production, there is also an increase in production that is closest to final production of consumer goods--though overall investment in the capital goods sector will be down.

There are few sectors of the economy that are as pure a capital goods sector of the economy as the venture capital market. Dow Jones is out today with data on venture capital finding for the year 2010. Overall, as would be expected in a year when the Fed was for the most part not printing money, there was less funding from the venture capital sector, i.e. that is a shrinking of the overall money for the capital goods sector. Here's DJ:
U.S. Venture Capital fund-raising fell to a seven-year low as firms raised $11.6 billion across 119 funds, a 14% drop from the $13.5 billion collected by 133 funds in 2009, according to figures from Dow Jones LP Source.
Most fascinating is that the data show the movement of the Hayekian triangles in real time. As would be expected, the width of the capital structure shrinks, most severely impacting the earlier stages of production, while the stages closest to final product show an increase. Here's DJ again:

Both early-stage and multi-stage funds continued to decline in 2010; however, late-stage funds saw an increase. Eight late-stage funds raised $1.5 billion in 2010, a 68% jump from the $887 million raised by nine funds in 2009.
Hayek rules!

1 comment:

  1. I thought Hayekian triangles were disproved (by Rothbard?)...