Quote from: vector76 on June 20, 2011, 01:41:54 PM

Purchasing power of the blacksmith is only greater if he spends his savings. If he doesn't spend his savings, everything works the same but with slightly different price levels. If he spends his savings he can buy stuff. Duh.

Not that simple. The problem is that if he saves in the short term he can increase his overall spending power significantly in the longer term, so he has no incentive to spend money now rather than later.

Quote from: BubbleBoy on June 20, 2011, 02:03:18 PM

1. He is in a good market position; competition will quickly move to erode his advantage and he will spend profits to become more competitive, thus this situation is temporary

You're assuming perfect competition of a kind that doesn't exist. In particular, setting up a competitor has high initial costs in terms of equipment and land, which acts as a barrier to entry. What makes it worse is that anyone with the money to fund this also has the option to just sit on it and watch their spending power grow in the same way as the original blacksmith, so it's only worth it if their expected return is greater than the amount of money they'd get for just doing nothing.