Economics Dictionary of ArgumentsHome
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| Interest rates: Interest rates represent the cost of borrowing money or the return on invested funds over a specified time, usually expressed as a percentage. They influence borrowing and saving decisions, impacting economic activities like loans, mortgages, and savings accounts, set by central banks or influenced by market forces like supply and demand. See also Central Bank, Economy, Supply, Demand, Markets._____________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 Interest Rates - Dictionary of Arguments
Boudreaux II 69 Interest rates/Hayek/Boudreaux: [Context Monetary supply, relative prices, information] (…) if enough new money is created and continually injected into the economy for a long-enough period of time, the prices of automobiles will rise by enough - and stay artificially high for long enough - to cause entrepreneurs and investors to shift some resources out of other industries and into automobile production. >Money supply, >Monetary policy/Hayek, >Relative prices, >Information/Hayek, >Inflation. Boudreaux II 69 Beginning inflation: Automobile producers will be the next in line to spend the newly created money. If automobile producers spend all ofthe additional money they get on, say, clothing, the prices of clothing will be the next to rise. Clothing sellers will, in turn, spend the new money that they get in some particular ways- say, on children's toys and kitchen appliances. The prices of children's toys and kitchen appliances will then rise. Interest rates/Hayek: What's true for distortions in the relative prices of consumer goods (such as automobiles and motorcycles) is true also for distortions in the prices of consumer goods relative to the prices of capital goods (such as bulldozers and skyscrapers). Indeed, Hayek argued that distortions in the prices of capital goods in relation to consumer goods are the chief source of booms and busts. >Capital goods, >Goods, >Investments, >Booms, >Economic cycle. The reason has to do with the central role of one particular set of prices: interest rates. Interest rates: Interest rates reflect people’s “time preference” - that is, their preference for consuming today rather than delaying consumption until tomorrow. The lower is people’s time preference, the more willing they are to delay consumption. >Time preference. And the more willing people are to delay consumption, the more they save. More savings, in turn, mean lower interest rates. (Banks have more money on hand to lend.) The lower are interest rates, the more attractive are long-term investments. >Saving. Boudreaux II 70 Example: (…) a transcontinental railroad that takes ten years to build is a more attractive investment for the potential builder ifthe interest rate is 3 percent than ifit's 10 percent. That's because the amount of interest that must be repaid when the railroad finally starts to operate and generate revenue will be much Iower if the railroad builder borrows funds at an interest rate of 3 percent than at a rate of 10 percent. So although this railroad might not be profitable to build at the higher interest rate, it will perhaps be profitable to build at the Iower interest rate. Information: Low interest rates signal to entrepreneurs that people in general are very willing to forego consuming today so that resources can be used to produce, not MP3 players, hot tubs, and other consumer goods today, but instead steel rails, locomotives, bulldozers, and other capital goods. Consumption: But what if people really don't want to delay their consumption for very long? Information: What if interest rates "lie" - telling entrepreneurs that people are saving more than they really are saving? 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 ofthe 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. Artificially Iow interest rates lead producers to undertake more time-consuming - "longer" - production projects than they would undertake at higher rates of interest. Boudreax 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. 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._____________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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