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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Murray N. Rothbard on Interest Rates - Dictionary of Arguments
Rothbard III 347 Interest rates/Rothbard: We here assume that the pure capitalists never purchase as a whole a factor that in itself could yield several units of service. They can only hire the services of factors per unit of time. >Factors of production/Rothbard, >Costs of production/Rothbard. E.g., A laborer cannot be bought, then, but his services can be bought over a period of time; i.e., he can be rented or hired. Rothbard III 349 Production/factors of production/investments/Rothbard: In the monetary economy, since money enters into all transactions, the discount of a future good against a present good can, in all cases, be expressed in terms of one good: money. This is so because the money commodity is a present good and because claims to future goods are almost always expressed in terms of future money income. The concept of rate of return is necessary in order for [the producer or investor] to compare different potential investments for different periods of time and involving different sums of money. For any amount of money that he saves, he would like to earn the greatest amount of net return, i.e., the greatest rate of net return. The absolute amount of return has to be reduced to units of time, and this is done by determining the rate per unit of time. Rothbard III 350 Pure interest rate/Evenly rotating economy/Rothbard: [in an evenly rotating economy], there is no entrepreneurial uncertainty, and the rate of net return is the pure exchange ratio between present and future goods. This rate of return is the rate of interest. This pure rate of interest will be uniform for all periods of time and for all lines of production and will remain constant in the evenly rotating economy. >Evenly rotating economy (ERE)/Rothbard. Rothbard III 351 Production: Suppose that at some time the rates of interest earned are not uniform as between several lines of production. If capitalists are generally earning 5 percent interest, and a capitalist is obtaining 7 percent in a particular line, other capitalists will enter this line and bid away the factors of production from him by raising factor prices. Rothbard III 370 Evenly rotating economy (ERE) /Rothbard: (…) in the ERE the interest return on monetary investment (the pure rate of interest) is the same everywhere in the economy, regardless of the type of product or the specific conditions of its production. Not only must the interest rate be uniform for each good; it must be uniform for every stage of every good. For suppose that the interest rate were higher in the higher stages than in the lower stages. Then capitalists would abandon producing in the lower stage, and shift to the higher stage, where the interest return is greater. Interest rate/production: It is important to realize that the interest rate is equal to the rate of price spread in the various stages. Too many writers consider the rate of interest as only the price of loans on the loan market. In reality, (…) the rate of interest pervades all time markets, and the productive loan market is a strictly subsidiary time market of only derivative importance.(1) Duration/time/production: We may now remove our restrictive assumption about the equality of duration of the various stages. (…) suppose that the uniform interest rate in the economy is 5 percent. This is 5 percent for a certain unit period of time, say a year. A production process or investment covering a period of two years will, in equilibrium, then earn 10 percent, the equivalent of 5 percent per year. The same will obtain for a stage of production of any length of time. Thus, irregularity or integration of stages does not hamper the equilibrating process in the slightest. Rothbard III 374 Production: The capitalists’ function is thus a time function, and their income is precisely an income representing the agio of present as compared to future goods. This interest income, then, is not derived from the concrete, heterogeneous capital goods, but from the generalized investment of time.(2) It comes from a willingness to sacrifice present goods for the purchase of future goods (the factor services). Rothbard III 375 Time preference/Rothbard: (…) a good at present is worth more now than its present value as a future good. Because money is the general medium of exchange, for the time market as well as for other markets, money is the present good, and the future goods are present expectations of the future acquisition of money. It follows from the law of time preference that present money is worth more than present expectations of the same amount of future money. In other words, future money (as we may call present expectations of money in the future) will always exchange at a discount compared to present money. This discount on future goods as compared with present goods (or, conversely, the premium commanded by present goods over future goods) is the rate of interest. Rothbard III 388 The time-market schedules of all individuals are aggregated on the market to form market-supply and market-demand schedules for present goods in terms of future goods. The supply schedule will increase with an increase in the rate of interest, and the demand schedule will fall with the higher rates of interest. Aggregating the supply and demand schedules on the time Rothbard III 389 market for all individuals in the market, we obtain (…) [a] demand curve for present goods in terms of the supply of future goods; it slopes rightward as the rate of interest falls. (…) the supply curve of present goods [is indicated] in terms of the demand for future goods; it slopes rightward as the rate of interest increases. The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor.(3) >Evenly Rotating Economy, >Time preference/Rothbard. Rothbard III 405 It seems likely that the demand schedule for present goods by the original productive factors will be highly inelastic in response to changes in the interest rate. With the large base amount, the discounting by various rates of interest will very likely make little difference to the factor-owner.(4) Large changes in the interest rate, which would make an enormous difference to capitalists and determine huge differences in interest income and the profitableness of various lengthy productive processes, would have a negligible effect on the earnings of the owners of the original productive factors. Rothbard III 773 Interest rates/Rothbard: In the determination of the interest rate, we must (…) take account of allocating one's money stock by adding to or subtracting from one's cash balance. A man may allocate his money to consumption, investment, or addition to his cash balance. Time preference: His time preferences govern the proportion which an individual devotes to present and to future goods, i.e., to consumption and to investment. Cash balance: Now suppose a man's demand-for-money schedule increases, and he therefore decides to allocate a proportion of his money income to increasing his cash balance. There is no reason to suppose that this increase affects the consumption/investment proportion at all. Time preference: It could, but if so, it would mean a change in his time preference schedule as well as in his demand for money. >Cash balance/Rothbard. Demand for money: If the demand for money increases, there is no reason why a change in the demandfor money should affect the interest rate one iota. There is no necessity at all for an increase in the demand for money to raise the interest rate, or a decline to Iower it - no more than the opposite. In fact, there is no causal connection between the two; (…). >Demand for money/Rothbard. Rothbard III 997 Interest rate/money supply/Rothbard: Equilibrium: It should not be surprising that the market tends to revert to its preferred ratios. The same process (…) takes place in all prices after a change in the money stock. Increased money always begins in one area of the economy, raising prices there, and filters and diffuses eventually over the whole economy, which then roughly returns to an equilibrium pattern conforming to the value of the money. Rothbard III 998 The market therefore reacts to a distortion ofthe free-market interest rate by proceeding to revert to that very rate. The distortion caused by credit expansion deceives businessmen into believing that more savings are available and causes them to malinvest - to invest in projects that will turn out to be unprofitable when consumers have a chance to reassert their true preferences. This reassertion takes place fairly quickly – as soon as owners of factors receive their increased incomes and spend them. Market interest rate/money supply/Economic theories/Rothbard: This theory permits us to resolve an age-old controversy among economists: whether an increase in the money supply can Iower the market rate of interest. Rothbard III 998 Mercantilism/Keynesianism: To the mercantilists - and to the Keynesians - it was obvious that an increased money stock permanently Iowered the rate of interest (given the demand for money). Classical economics: To the classicists it was obvious that changes in the money stock could affect only the value of the monetary unit, and not the rate of interest. RothbardVsMercantilism/RothbardVsKeynesianism: The answer is that an increase in the supply of money does Iower the rate of interest when it enters the market as credit expansion, but only temporarily. In the long run (and this long run is not very "long"), the market re-establishes the free-market time-preference interest rate and eliminates the change. In the long run a change in the money stock affects only the value of the monetary unit. >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/Rothbard. Rothbard III 1002 Interest rate/Rothbard: (…) credit expansion does not necessarily Iower the interest rate below the rate previously recorded; it Iowers the rate below what it would have been in the free market and thus creates distortion and malinvestment. >Business cycle/Rothbard. Market interest rate/purchasing power: Recorded interest rates in the boom will generally rise, in fact, because of the purchasing-power component in the market interest rate. An increase in prices (…) generates a positive purchasing-power component in the natural interest rate, i.e., the rate of return earned by businessmen on the market. >Natural interest rate. Rothbard III 1003 Free market: In the free market this would quickly be reflected in the Ioan rate, which (…) is completely dependent on the natural rate. But a continual influx of circulating credit prevents the Ioan rate from catching up with the natural rate, and thereby generates the business-cycle process.(5) Loans: A further corollary of this bank-created discrepancy between the Ioan rate and the natural rate is that creditors on the Ioan market suffer losses for the benefit of their debtors: the capitalists on the stock market or those who own their own businesses. The latter gain during the boom by the differential between the Ioan rate and the natural rate, while the creditors (apart from banks, which create their own money) lose to the same extent. 1. In the reams of commentary on J.M. Keynes’ General Theory, no one has noticed the very revealing passage in which Keynes criticizes Mises’ discussion of this point. Keynes asserted that Mises’ “peculiar” new theory of interest “confused” the “marginal efficiency of capital” (the net rate of return on an investment) with the rate of interest. The point is that the “marginal efficiency of capital” is indeed the rate of interest! It is a price on the time market. It was precisely this “natural” rate, rather than the loan rate, that had been a central problem of interest theory for many years. The essentials of this doctrine were set forth by Böhm-Bawerk in Capital and Interest and should therefore not have been surprising to Keynes. See John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace & Co., 1936), pp. 192–93. It is precisely this preoccupation with the relatively unimportant problems of the loan market that constitutes one of the greatest defects of the Keynesian theory of interest. (RothbardVsKeynes). 2. As Böhm-Bawerk declared: Interest . . . may be obtained from any capital, no matter what be the kind of goods of which the capital consists: from goods that are barren as well as from those that are naturally fruitful; from perishable as well as from durable goods; from goods that can be replaced and from goods that cannot be replaced; from money as well as from commodities. (Böhm-Bawerk, Capital and Interest, p. 1) 3. The importance of time preference was first seen by Böhm-Bawerk in his Capital and Interest. The sole importance of time preference has been grasped by extremely few economists, notably by Frank A. Fetter and Ludwig von Mises. See Fetter, Economic Principles, pp. 235-316; idem, “Interest Theories, Old and New,” American Economic Review, March, 1914, pp. 68-92; and Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 476-534. 4. The rate of interest, however, will make a great deal of difference in so far as he is an owner and seller of a durable good. Land is, of course, durable almost by definition - in fact, generally permanent. So far, we have been dealing only with the sale of factor services, i.e., the “hire” or rent” of the factor, and abstracting from the sale or valuation of durable factors, which embody future services. Durable land (…) is “capitalized,” i.e., the value of the factor as a whole is the discounted sum of its future MVP’s ((marginal value product), and there the interest rate will make a significant difference. The price of durable land, however, is irrelevant to the supply schedule of land services in demand for present money. 5. Since Knut Wicksell is one of the fathers of this business-cycle approach, it is important to stress that our usage of "natural rate" differs from his. Wicksell's "natural rate" was akin to our "free-market rate"; our "natural rate" is the rate of return earned by businesses on the existing market without considering Ioan interest. It corresponds to what has been misleadingly called the "normal profit rate," but is actually the basic rate of interest._____________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. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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