My paper is titled, A Defense of the Rothbardian Structure Production, and in it, recently,
as someone mentioned a little earlier, Professor Holzman has written a couple of papers criticizing
the traditional Rothbardian or Austrian, some very big statements about time preference
and how it's related to the structure production.
The aggregate proportion between consumption and investment is not systematically related
to the interest rate and this leads to very different conclusions than what has been previously
thought by Austrian economists.
So one of his main, what I'll be concentrating on in this presentation, one of his main critiques
is that Austrian economics has neglected the change in the demand for present goods, and
that this leads to a wildly, a very different framework for the structure of production
and different conclusions.
Okay.
So, start.
All right.
So, just a, I know a lot of people have been talking about time preference, just very brief
Review of Time Preference, Law of Time Preference, present good is preferred to a future good,
present consumption is preferred to future consumption, so that means there's a premium
on present consumption, and the rate of time preference is this premium on present goods
and it's the degree to which an actor prefers present goods to future goods.
And this is his interest rate, you know, if you think of it in Crusoeconomics, and then
you have the interest rate in the catalaxies, so in the money economy, it's the societal
the premium on present goods, which is money that can be spent on consumer goods, over
future money, which is money earned from investments. So it's the premium on present money over
future money, and it's the degree to which society prefers present consumption to future
consumption. Okay. So, all right, Rothbard says that time preference systematically influences
with a proportion of consumption in investment, and this still holds in the aggregate and
this aggregate proportion of consumption in investment determines the interest rate.
So the proportion between consumption and investment is systematically related to the
interest rate in Rothbard's framework.
So if there's an increase in that proportion, there's going to be a higher interest rate.
If there's a decrease in that proportion, there's going to be a decrease in interest
rate.
By him, by the interest rate, I'm talking about the pure rate of interest, so no price premium, there could be psychic component, an entrepreneurial risk component, I'm talking strictly about the pure time reference as an example as you'd see in the imaginary and impossible economy of the evenly rotating economy.
So for Holzman, it's only a contingent relationship due to a changing demand for the present goods.
So for instance, traditional Austrian economics shows that there will be an increase in supply
of present goods on a constant demand curve.
So that's going to lead to a lowering of the rate of interest and an increase in the
quantity of savings.
So traditional canonical Austrian depictions of a change in the production structure.
For Holzman, though, he could say that, well, in fact, Austrian economics has neglected
the demand for present goods, and there could be an increase in demand for present goods.
And you can just look at this chart from basic price theory.
It could lead to a higher interest rate at an increase in quantity savings.
So the proportion between consumption investment is no longer systematically determines the
and the rate of interest in that this, in fact, this change can lead to very different reconfigurations
in the production structure.
Okay, so just elaboration on the demand for present goods.
So okay, all right, before I just like to say, so capitalists supply present money to both
Both the original factors of production and prior capitalists selling their finished product.
So they supply present goods in exchange for future goods.
And original factors supply, they demand present goods, the money a capitalist can spend to
them, and they supply future goods.
And in this sense, the future goods is the future money.
So it's the present, as I quote Rothbard, it is the present anticipation of a yield
of Money and the Future from the sale of the final product.
So for him, the future goods of capitalists supply, they obviously apply a working circulating
capital but in terms of the interest rate, they supply a greater amount of future money.
So the demand for present goods, it can be split in terms of the aggregate time market,
as I said, the demand by the original factors of production and the demand by capitalists.
And the demand by capitalists is a more precise way of describing the capitalist time market
function would be they supply present goods and they demand, quote Rothbard, present goods
that are more distantly future than the product he supplies.
So although capitalists demand present goods in the future, it is dependent on the amount
of present goods capitalists are willing to save beforehand.
And capitalists cannot demand present goods when they sell a product unless they have
have supplied present goods in an earlier time period.
So this is why Rothbard, he says that a capitalist's demand for present goods is, quote, strictly
derivative independent and a capitalist's activities are guided by his role as a supplier.
So this would make sense because, you know, capitalists have to save first and they have
to, in order for them to demand present goods when they sell their product, they've had
to have saved money beforehand in order to make that product.
So as Rothbard says, if we cross that out, you say, okay, it's derived.
And then we go as Rothbard describes the original factor demand, he says, quote, the pure demanders
of present goods on the time market are the various groups of laborers and landowners,
the sellers of the services of original productive factors.
So for him, it is the independent demand or the pure demand for present goods.
So it is also important to note that capital earns only a gross, not a net rent.
So the capitalists, they earn only interest and all capital goods, as Rothbard says, they
are stored up labor, land and time and capital is not an independent productive factor like
land and labor.
So capital goods are no interest return, no pure return in their discounted marginal value
Products can be traced back to the original factors and interest.
So as I was saying earlier about the future goods, the original factors supply and a production,
the future money, this is based off of their discounted marginal value product.
So according to the law of imputation, this is that what consumers are willing to spend,
so the consumption, prices determines cost and that what consumers are willing to spend
in the economy that it radiates and percolates throughout the economy and that determines
the very, it determines the discounted marginal value products or the marginal value products
of factors of production.
So at each stage the future money that the factors supply in the time market or their
isolable discount marginal value product is strictly limited by the amount consumers
are willing to pay for an end product of a production process.
So we would think that this makes sense that, you know, as we know that, you know, cost
does not influence price and that price determines, in fact, determines cost.
This is the Austrian analysis of value.
So we, so since capital orange is only a gross, not a net rent, canceling these out leaves
the net supply of future goods.
And this net supply of future goods in the evenly rotating economy, this abstract equilibrium
situation that allows Austrians to deduce laws is equal to interest income, which is
the net income that capitalists earn, and original factor income, which is what the
landowners and the laborers earn.
And this is equal in the equilibrium situation, this is equal to consumption.
And the main point I try and argue is that consumption limits the pure demand for present
goods.
And to quote Rothbard, he says, it is, quote, overall, it is consumption that provides the
net income in the equilibrium situation and is the, quote, he says, fund out of which
money prices and net incomes are paid to the original factors.
So consumption provides the fund, you know, the fund from, for which net income is paid
out of and only consumption can change the independent demand for present goods.
This is not to say that capitalists certainly save money and it's not to say that consumption
fuels the economy and that savings are needed, but this is saying that the amount that consumers
spend in an economy, this determines the discounted marginal value products and that this in fact
and the, you know, capitalists will only spend, you know, a certain amount on original factors
based on what they expect to earn from them, okay.
So all right, and what I'm trying to, so exchange demand for money is different than the demand
for present goods on the time market.
So a original laborer, he can, if he tries to do, if he wants to work more, he can increase
is the way to make money.
So, the idea is that if you're trying to increase the supply of labor and you try and get more
job, more hours, or even if we could say if there's a huge influx in immigration, which
is an example in what Holzman provides, just the increase in the labor supply, that this
will increase the demand for present goods on the time market.
But unless consumption has changed, the aggregate amount of consumption has changed, if there's,
we just sort of as a thought experiment, we imagine that the labor supply has increased,
is doubled overnight, and if consumption has to change in the relative spending patterns,
all that's going to happen is wages are just going to fall off a cliff.
It's not as if original factors are going to be able to obtain a greater amount of the
savings and push the interest rate up, because if we have this same, what I was explaining
earlier, just with numbers, if the demand for present goods increases, it's going to
And since there's going to be a higher interest rate and an increase in the quantity of present
goods supplied, and since there's going to be a higher interest rate, there's going to
be a higher amount of future goods.
But if we're assuming that consumption has an increase, then the amount of future goods
the original factors have supplied can't increase.
So in reality, you can only have a diagram that looks like this if the interest rate
in fact has, if consumption has in fact increased on the original factor time market.
So, okay, all right, so I won't go, don't need to go into the entire step by step here,
but just, I know this was explained, criticized a little earlier.
I'm just using the evenly rotating economy as a given round of economic activity
is an abstract concept, especially with these production stages.
So if we look at the typical diagram Rothbard had, as sort of what I explained earlier with
the net income fund, the total amount of income can be broken down into gross income and gross
expenditures.
And then this goes from the income from capitalist save, the income that is from consumption,
And this is equal to total gross consumption plus total gross investment.
And overall, this is capitalist, the interest income from saving plus the original factor
income from saving.
And there's this name, I just have the pure capital fund.
It has nothing to do with Frank Knight.
It's just a name for the gross volume of expenditures that does not go either to the original factors
or interest income.
It's not meant to endorse a perpetual source of capital without saving, and in an evenly rotating economy, all net income, all income can be traced back to original factor and interest income.
But this is just looking at the aggregate amount of the, you know, the helicopter view of expenditures, and that this almost sort of the pure capital fund can give an idea of how much is spent on, quote, capital goods.
So, all right, so basically the red bars are underlined are, you know, that is the total
gross consumption and the blue bars are total gross investment.
So we will see what happens.
Okay, so this is the, okay, this is the aggregate time market graphs.
So sort of what I was saying earlier, you have the time market overall to the very left.
Capitalist, the original factors, it's the pure demand for the time, it's the pure demand
for our present goods, and we have in the middle the derived demand by capitalists,
and then you add those two together and you get the total gross saving, total gross investment.
Again, these aren't separate markets, you know, these are, it's really just a very abstract
tool that it's not going to say, you know, the original factors are complete, you know,
in this one market and then, you know, capital goods is completely separated.
This is only just sort of splitting apart the, you know, as we always shown, the supply of
present good, the total supply of present goods and the total demand for present goods.
And I know, you know, I didn't say this earlier, this isn't including the other important pure
demand for present goods, which is consumer loans, but that's not fundamental to an economy.
Okay.
And so I'm not analyzing that.
So okay, so we have a decrease in time preference, and so with this, this is, in fact, using
this analysis of the demand for present goods limited by consumption, it leads to the same
conclusion that traditional Austrian economists have explained, mainly the slide on the right,
that the increase in supply of present goods along a constant demand curve, but in fact,
I think it allows for a much richer sort of step-by-step process where, so we know from,
So if consumption decreases, we have a typical decrease in consumption, an increase in investment.
The supply of future goods, the net supply of future goods by original factors will decrease.
So according to the law of marginal utility, a decrease in supply of the good foregone
on a demand schedule increases the relative rankings of the good and decreasing the demand
curve.
So the demand curve to the very right, I mean the very left, excuse me, shifts to the left.
So this is the decrease in consumption and you have the increase in supply because interest
income is falling and there's many ways to do this, I unfortunately don't have time,
but as Rothbard says, original factors, their income, it could either increase, decrease
or stay the same.
And just to provide another quote from Rothbard, he says, but consumption has declined from
from 100 ounces to 80 ounces, and it is consumption that provides the net income in the equilibrium
situation.
Net income, as it were, the, quote, fund out of which money, prices, and incomes are paid
through original factors.
And this fund has declined.
So this is building on the quote I said earlier.
And in the graph in the middle, we have the derived demand by capitalists, capital goods.
And as I was explaining earlier, since the demand for present goods by capitalists is
is limited by capitalist saving. When there's an increase, an absolute increase in saving,
it's going to push the demand for present goods up. However, the supply of present goods
is going to outstrip that because you're going to have an absolute increase in investment
spending and you're also going to have, capitalists are going to have to supply less money to
this net income fund since that income fund, you know, to the original factors has declined.
So the supply of present goods in that market will strip the increase in demand and it's
going to lead to a lower interest rate.
So in fact, the demand for present goods remains relatively constant in the aggregate, but
as you've seen, there's been a huge revolution, so to speak, in the actual demand because
less is demanded by the original factors and more is demanded by the derived demand by
capitalists.
And I think that Rothbard presents a similar analysis by stating quote, one question that
immediately presents itself is, how can the prices of factors I'm adding in brackets and
the net income fund, you know, in bracket, decline while the gross income remains the
same and gross investment even increases?
The answer is that the larger gross investment fund is absorbed, so to speak, by the higher
prices of high order capital goods in brackets and the gross income of capitalists in the
and the Consequent New Stages of Turnover of These Goods.
I use this because the demand for present goods allows explicit graphical analysis and even, I think, some important linguistic analysis of how growth could change with a change in the money relations.
only consumption decreases and absolute amount of saving stays the same, or if the consumption
and saving decreases at the same proportion, which means interest rate, the interest rate
stays the same.
I go into this later in the paper, unfortunately I don't have time, but I think it's nice
to conclude that it is imperative to reiterate that ultimately changes in the production
structure are systematically determined by consumer and producer spending.
Changes in producer spending exert their influence through an increase in savings, while changes
in consumer spending modify the net income fund and provide or take out an additional
source of monetary savings that could be capitalized in the production structure.
The independent demand for present goods, as portrayed by Hulsman, exerts no exogenous
influence on the structure of production.
The basic elements of time preference that are deduced from Crusoeconomics, such as the
The rate of time preference and the relative allocation of resources between present and
future consumption can be extended to the aggregate as the sole determinants of changes
in the production structure through capital-based macroeconomics.
And thank you very much.