Economics Dictionary of ArgumentsHome
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| Market interest rate: The market interest rate is the prevailing rate at which borrowers can obtain funds and lenders provide funds in financial markets. It reflects the supply and demand for credit, influenced by factors like central bank policies, inflation expectations, economic conditions, and credit risk, serving as a key determinant in financial decision-making. See also Interest rates, Market._____________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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Irving Fisher on Market Interest Rate - Dictionary of Arguments
Rothbard III 792 Market Interest Rate/Fisher, Irving/Rothbard: Many economists, beginning with Irving Fisher, have asserted that the market rate of interest, in addition to containing specific entrepreneurial components superimposed on the pure rate of interest, also contains a "price" or a "purchasing-power component." Purchasing power: When the purchasing power of money is generally expected to rise, the theory asserts that the market rate of interest falls correspondingly; when the PPM (purchasing power of monetary unit) is expected to fall, the theory declares that the market rate of interest rises correspondingly. RothbardVsFisher, Irving: These economists erred by concentrating on the Ioan rate rather than on the natural rate (the rate of return). The reasoning behind this theory was as follows: If the purchasing power of money is expected to change, then the pure rate of interest (determined by time preference) will no longer be the same in "real terms." Suppose that 100 gold ounces exchange for 105 gold ounces a year from now - i.e., that the rate of interest is 5 percent. Now, suddenly, let there be a general expectation that the purchasing power of money will increase. In that case, a Iower amount to be returned, say 102 ounces, may yield 5 percent real interest in terms of purchasing power. A general expectation of a rise in purchasing power, therefore, will Iower the market rate of interest at present, while a general expectation of a fall in purchasing power will raise the rate.(1) Rothbard III 793 RothbardVsFisher, Irving. There is a fatal defect in this generally accepted line of reasoning. Suppose, for example, that prices are generally expected to fall by 50 percent in the next Year. Would someone lend 100 gold ounces to exchange for 53 ounces one year from now? Why not? This would certainly preserve the real interest rate at 5 percent. But then why should the would-be lenders not simply hold on to their money and double their real assets as a result of the price fall? And that is precisely what they would do; they certainly would not give money away, even though their real assets would be greater than before. FisherVsVs: Fisher simply shrugged off this point by saying that the purchasing-power premium could never make the interest rate negative. But this flaw vitiates the entire theory. Rothbard III 794 Natural rate of interest: The root of the diffculty consists in ignoring the natural rate of interest. Let us consider the interest rate in those terms. Then, suppose 100 ounces are paid for factors that will be transformed in one year into a product that sells for 105 gold ounces, for an interest gain of five and an interest return of 5 percent. Now a general expectation arises of a general halving of prices one year from now. The selling price of the product will be 53 ounces in a year's time. What happens now? Will entrepreneurs buy factors for 100 and sell at 53 merely because their real interest rate is preserved? Certainly not. They will do so only if they do not at all anticipate the change in purchasing power. But to the extent that it is anticipated, they will hold money rather than buy factors. This will immediately Iower factor prices to their expected future levels, say from 100 to 50. Loan rate: What happens to the Ioan rate is analytically quite trivial. It is simply a reflection of the natural rate and depends on how the expectations and judgment of the people on the Ioan market compare with those on the stock and other markets. Free market/Rothbard: For the free economy, there is no point in separately analyzing the Ioan market. Analysis of the Fisher problem - the relation of the interest rate to price changes - should concentrate on the natural rate of interest. 1. Irving Fisher, The Rate of Interest (New York, 1907), chap. v, xiv; idem, Purchasing Power of Money, pp. 56-59._____________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. |
F.M. Fisher I Franklin M. Fisher Disequilibrium Foundations of Equilibrium Economics (Econometric Society Monographs) Cambridge 1989 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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> Counter arguments against Fisher
> Counter arguments in relation to Market Interest Rate
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