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1. Production & the
Market Process
Robert P. Murphy
Mises Academy
August 24, 2011
Lecture 6: 2nd
Half of Chapter 8 of
Man, Economy, and State

2. 2nd
Half of
Chapter 8 of MESI. Review of Original ERE
1. Net Saving & Investment
2. A Changing Economy
3. Capital Consumption
V. Roundabout Processes
VI. Risk vs. Uncertainty

3. I. Review Original ERE

4. Basic Facts
The rate of interest is 5%.
There are 6 stages of production.
Every period…
Total Consumption: 100 oz.
Total Gross Saving / Gross Investment: 318
oz.
Total Gross Income: 418 oz.
Total Net Income: 100 oz.
Total Net Saving / Net Investment: 0 oz.

5. II. Net Saving & Investment
Households lower their time preferences. Out
of their net income of 100 oz., they now decide
to consume only 80 oz. and to save/invest the
remaining 20 oz.
Since this is more than necessary to maintain
capital structure, it represents net
saving/investment.

6. A. New Facts
The rate of interest must be lower than 5%.
There must be more than 6 stages of
production.
Every period…
Total Consumption: 80 oz.
Total Gross Saving / Gross Investment: 338
oz.
Total Gross Income: 418 oz.
Total Net Income: Either 100 or 80 oz.

7. B. A Possible Illustration

8. C. Effect on Incomes
Since total net income in monetary terms falls,
at least some groups (possibly all) will see
money incomes (whether interest, rent, or
wages) fall.
But in real terms, workers and landowners
definitely see an increase in income.

9. III. A Changing Economy
A progressing economy has rising gross
investment (hence positive net investment)
and, according to Rothbard and Mises,
aggregate net profits.
A retrogressing economy has falling gross
investment (net disinvestment) and aggregate
net losses.
A stationary economy has stable gross
investment (zero net investment) and
aggregate profits equal losses. (Note this isn’t

10. IV. Capital Consumption

11. V. Roundabout Processes

12. VI. Risk vs. Uncertainty