The Structure of Production
Higher-order and lower-order goods in the capital structure — the Hayekian triangle that reveals the economy's true shape.
Bohm-Bawerk / Hayek
Production is not instantaneous. Raw materials (iron ore) must be transformed through multiple stages — smelting, manufacturing, assembly, distribution — before becoming consumer goods (a car). Each stage is a higher-order good; the final consumer product is the lowest-order good.
The Hayekian Triangle
Hayek visualized this as a triangle: the horizontal axis represents time (stages of production), the vertical axis represents value added. A healthy economy has a triangle whose proportions reflect real savings and real time preferences.
Why Credit Distortion Matters
Artificially low interest rates lengthen the production structure — encouraging investment in higher-order goods (tech, infrastructure) without corresponding savings. When rates normalize, these investments are revealed as unsustainable. The triangle collapses from the top.