Economics Dictionary of ArgumentsHome
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| Long and short run: In economics, the short run is a period where at least one input (like capital) is fixed, limiting flexibility. The long run is a period where all inputs can be varied, allowing full adjustment to market conditions. Firms can enter or exit the market in the long run, but not in the short run. See also Interest rates, Credit, Loans, Inflation, Monetary policy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Friedrich A. von Hayek on Long run/short run - Dictionary of Arguments
Boudreaux II 70 Long and short run/Business cycles/Hayek: Hayek argued that such a lie plays an especially critical role in business cycles. When the money supply is increased, the new money typically enters the economy through banks - and to Ioan this new money, banks Iower the rates of interest they charge borrowers. Interest rates/Hayek: In Hayek's view, the prices that are most dangerously distorted by expansions of the money supply are interest rates. The artificially Iow interest rates prompt entrepreneurs and businesses to borrow too much - that is, to borrow more than people are really saving. Time/long run/short run: Artificially Iow interest rates lead producers to undertake more time-consuming - "longer" - production projects than they would undertake at higher rates of interest. Boudreaux II 71 Unfortunately, interest rates are Iower not because people are saving more but only because the creation of new money pushed these rates Iower. >Monetary policy Hayek. Long run: In this case, plans to build long-run projects - such as, again, a railroad that takes ten years to complete - will eventually run into trouble. With people saving too little to allow all of the necessary steel rails, workers' barracks, and other capital goods to be produced, the railroad builder in time finds that he cannot complete his project profitably. He must lay off his workers.As time passes and the investments in excessively “long” business projects are finally entirely liquidated, laid-off workers find other jobs. This result, however, occurs only in the long run. Short run: Much economic trouble arises during the short run (which can be a long time when measured on a calendar). Once again, before all of the newly created money finally (“in the long-run”) is spread evenly throughout the economy, the pattern of relative prices is distorted by the stream of new money injected into the economy. During the time it takes for the newly created money to work its way from the markets where it is first spent into each of the economy’s many other markets, the distorted relative prices - including artificially low interest rates - mislead people into making economic decisions that are inconsistent with the true patterns of consumer demands and resource supplies. It is regrettable that the process of unwinding unsustainable investments takes time. But lasting economic health requires that such unwinding occurs._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
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