Financial services and its elasticity

We often hear the complaint that investors should be investing in this or that innovation, often times the complaint is about energy efficiency investments.

How rapidly can the investment sector respond to an opportunity in energy developments? We have examples of financial elasticity in Silicon Valley. From the start it takes about 6-8months (my estimate) for a venture capital group to raise money and open up an investment office. That is elasticity.

From start up to production, it takes a car company about five years to develop the next generation of high mileage vehicle. That is inelasticity.

Great recession are rarely caused by financial inelasticity. Consider the example of Roosevelt raising the gold price from 1932 on. Sumner correctly observes that liquidity transmits faster that any other good. But, as Roosevelt played his game of raising the price of gold, what was the pacing item? More likely, the pacing item was the rate at which investment could be applied to the economy to solve constraints. What investors wanted was consistency of price, whether that consistency came from Roosevelt pacing the price of gold, or private investors pacing the rate of deflation made no difference, the requirement was consistency.

Generally great recessions are caused by real constraints that take time to solve. I can guestimate the elasticity of various sectors, defined in terms of their equilibrium constants as follows:

Financial - 6-8 months
Food Retail - 12 months
Housing - 24 months
Transportation vehicles - 48 moths
Roads - 60 months
Energy - 80 months
Defense - 120 months
Government services - 240 months


These guesses are highly biased and professional economists should measure them exactly. Equilibrium times will also have a long and short term component.

Update:

To avoid confusion, how does one distinguish between a change in the flow rate in an existing distribution channel and a change in the distribution channel? Depends on whare the change is viewed. Adding 1,000 homes to my home town looks like a structural change to us here in town. But to Freddie Mac it looks like a change in the flows of an existing channel. So, I would lump all changes into one category, structural changes and then I would say that some structural changes can be estimated to sufficient accuracy as changes in flow rates. In Great Recessions, we adopt structural change models throughout, when operating near equilibrium we use the change in flow rate model. They yield different mathematics.