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NOTE XIX. The Rate of Interest

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19. The Rate of Interest 1. The Phenomenon of Interest

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It has been shown that time preference is a category inherent in every human action.

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Time preference manifests itself in the phenomenon of originary interest, that is, the discount

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of future goods as against present goods.

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Interest is not merely interest on capital.

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Interest is not the specific income derived from the utilization of capital goods.

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The correspondence between three factors of production, labor, capital and land, and three

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classes of income, wages, profit and rent, as taught by the classical economists, is

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untenable.

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Rent is not the specific revenue from land. Rent is a general catallactic phenomenon.

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It plays in the field of labor and capital goods the same role it plays in the yield

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of land. Furthermore, there is no homogeneous source of income that could be called profit

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in the sense in which the classical economists applied this term. Profit in the sense of

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Entrepreneurial profit and interest are no more characteristic of capital than they are

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of land.

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The prices of consumers' goods are, by the interplay of the forces operating on the market,

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a portion to the various complementary factors cooperating in their production.

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As the consumers' goods are present goods, while the factors of production are means

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As for the production of future goods, and as present goods are valued higher than future

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goods of the same kind and quantity, the sum thus apportioned even in the imaginary construction

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of the evenly rotating economy falls behind the present price of the consumer's goods

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concerned.

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This difference is the originary interest.

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It is not specifically connected with any of the three classes of factors of production

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which the classical economists distinguished.

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Entrepreneurial profit and loss are produced by changes in the data and the resulting price

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changes which occur in the passing of the period of production.

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Naive reasoning does not see any problem in the current revenue derived from hunting,

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Fishing, cattle breeding, forestry and agriculture.

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Nature generates deer, fish and cattle and makes them grow, causes the cows to give milk

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and the chickens to lay eggs, the trees to put on wood and to bear fruit, and the seeds

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to shoot into ears.

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He who has a title to appropriate for himself this recurring wealth enjoys a steady income.

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Like a stream which continually carries new water, the stream of income flows continually

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and conveys again and again new wealth.

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The whole process is plainly a natural phenomenon.

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But for the economist a problem is presented in the determination of prices for land, cattle

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and all the rest.

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If future goods were not bought and sold at a discount as against present goods, the

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The buyer of land would have to pay a price which equals the sum of all future net revenues,

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and which would leave nothing for a current reiterated income.

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The yearly recurring proceeds of the owners of land and cattle are not marked by any characteristic

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which would catallactically distinguish them from the proceeds stemming from produced factors

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of Money, The Theory of Money and Credit of Money and Credit of Money and Credit of Money

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The ownership of a machine or a bale of cotton is the control of its cooperation in the manufacture of all goods which are produced with its cooperation.

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The fundamental fallacy implied in all the productivity and use approaches to the problem of interest was that they traced back the phenomenon of interest to these productive services rendered by the factors of production.

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However, the serviceableness of the factors of production determines the prices paid for

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them, not interest.

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These prices exhaust the whole difference between the productivity of a process aided

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by a definite factor's cooperation and that of a process lacking this cooperation.

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The difference between the sum of the prices of the complementary factors of production

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and the products, which emerges even in the absence of changes in the market data concerned,

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is an outcome of the higher valuation of present goods as compared with future goods.

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As production goes on, the factors of production are transformed, or ripen, into present goods

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of a higher value.

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This increment is the source of specific proceeds flowing into the hands of the owners of the

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The Factors of Production of Originary Interest

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The owners of the material factors of production, as distinct from the pure entrepreneurs of

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the imaginary construction of an integration of catalactic functions, harvest two catallactically

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different items.

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The prices paid for the productive cooperation of the factors they control on the one hand,

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and interest on the other hand.

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These two things must not be confused.

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It is not permissible to refer in the explanation of interest to the services rendered by the

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factors of production in the turning out of products.

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Interest is a homogeneous phenomenon.

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There are no different sources of interest.

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Interest on durable goods and interest on consumption credit are, like other kinds of

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Interest and Outgrowth of the Higher Valuation of Present Goods as Against Future Goods

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2.

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Originary Interest

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Originary interest is the ratio of the value assigned to want satisfaction in the immediate

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future and the value assigned to want satisfaction in remoter periods of the future.

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It manifests itself in the market economy in the discount of future goods as against

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present goods.

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It is a ratio of commodity prices, not a price in itself.

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There prevails a tendency toward the equalization of this ratio for all commodities.

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In the imaginary construction of the evenly rotating economy, the rate of originary interest

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is the same for all commodities.

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Originary interest is not the price paid for the services of capital.

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The higher productivity of more time-consuming roundabout methods of production, which is

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referred to by Boehm-Bawerk and by some later economists in the explanation of interest,

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does not explain the phenomenon.

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It is, on the contrary, the phenomenon of originary interest that explains why less

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This time-consuming methods of production are resorted to, in spite of the fact that

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more time-consuming methods would render a higher output per unit of input.

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Moreover, the phenomenon of originary interest explains why pieces of usable land can be

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sold and bought at finite prices.

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If the future services which a piece of land can render were to be valued in the same way

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In the way in which its present services are valued, no finite price would be high enough

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to impel its owner to sell it.

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Land could neither be bought nor sold against definite amounts of money, nor bartered against

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goods which can render only a finite number of services.

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Pieces of land would be bartered only against other pieces of land.

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A superstructure that can yield during a period of 10 years an annual revenue of $100 would

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be priced, apart from the soil on which it is built, at the beginning of this period

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at $1000, at the beginning of the second year at $900, and so on.

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Originary interest is not a price determined on the market by the interplay of the demand

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Demand for and the supply of capital or capital goods.

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Its height does not depend on the extent of this demand and supply.

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It is rather the rate of originary interest that determines both the demand for and the

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supply of capital and capital goods.

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It determines how much of the available supply of goods is to be devoted to consumption in

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in the immediate future and how much to provision for remoter periods of the future.

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People do not save and accumulate capital because there is interest.

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Interest is neither the impetus to saving nor the reward or the compensation granted

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for abstaining from immediate consumption.

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It is the ratio in the mutual valuation of present goods as against future goods.

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The loan market does not determine the rate of interest. It adjusts the rate of interest

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on loans to the rate of originary interest as manifested in the discount of future goods.

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Originary interest is a category of human action. It is operative in any valuation of

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external things and can never disappear. If one day the state of affairs were to return,

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In the modern, which was actual at the close of the first millennium of the Christian era,

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when people believed that the ultimate end of all earthly things was impending, men would

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stop providing for future secular wants.

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The factors of production would, in their eyes, become useless and worthless.

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The discount of future goods as against present goods would not vanish.

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It would, on the contrary, increase beyond all measure.

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On the other hand, the fading away of originary interest would mean that people do not care

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at all for one's satisfaction in nearer periods of the future.

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It would mean that they prefer to an apple available today, tomorrow, in one year or

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in ten years, two apples available in a thousand or ten thousand years.

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We cannot even think of a world in which originary interest would not exist as an inexorable

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element in every kind of action.

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Whether there is or is not division of labor and social cooperation, and whether society

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is organized on the basis of private or of public control of the means of production,

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originary interest is always present.

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In a socialist commonwealth, its role would not differ from that in the market economy.

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Boehm-Bawerk has once for all unmasked the fallacies of the naïve productivity explanations

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of interest.

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That is, of the idea that interest is the expression of the physical productivity of

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factors of production.

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However, Boehm-Bawerk has himself based his own theory, to some extent, on the productivity

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Productivity Approach.

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In referring in his explanation to the technological superiority of more time-consuming, roundabout

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processes of production, he avoids the crudity of the naive productivity fallacies, but in

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fact he returns, although in a subtler form, to the productivity approach.

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Those later economists who, neglecting the time preference idea, have stressed exclusively

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Originally the Productivity idea contained in Boehm-Bawerk's theory cannot help concluding

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that originary interest must disappear if men were one day to reach a state of affairs

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in which no further lengthening of the period of production could bring about a further

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increase in productivity.

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This is, however, utterly wrong.

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The interest cannot disappear as long as there is scarcity and therefore action.

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As long as the world is not transformed into a land of cocaine, men are faced with scarcity

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and must act and economize.

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They are forced to choose between satisfaction in nearer and in remoter periods of the future,

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as neither for the former nor for the latter can full contentment be attained.

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Then a change in the employment of factors of production which withdraws such factors

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from their employment for want satisfaction in the nearer future and devotes them to want

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satisfaction in the remoter future must necessarily impair the state of satisfaction in the nearer

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future and improve it in the remoter future.

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If we were to assume that this is not the case, we should become embroiled in insoluble contradictions.

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We may at best think of a state of affairs in which technological knowledge and skill

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have reached a point beyond which no further progress is possible for mortal men.

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No new processes increasing the output per unit of input can henceforth be invented.

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But if we suppose that some factors of production are scarce, we must not assume that all processes

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which, apart from the time they absorb, are the most productive ones, are fully utilized,

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and that no process rendering a smaller output per unit of input is resorted to merely because

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because of the fact that it produces its final result sooner than other, physically more

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productive processes.

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Scarcity of factors of production means that we are in a position to draft plans for the

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improvement of our well-being, the realization of which is unfeasible because of the insufficient

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quantity of the means available.

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It is precisely the unfeasibility of such desirable improvements that constitutes the

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element of scarcity.

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The reasoning of the modern supporters of the productivity approach is misled by the

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connotations of Boehm-Bawerk's term roundabout methods of production, and the idea of technological

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improvement which it suggests.

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However, if there is scarcity, there must always be an unused technological opportunity

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to improve the state of well-being by a lengthening of the period of production in some branches

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of industry, regardless of whether or not the state of technological knowledge has changed.

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If the means are scarce, if the praxeological correlation of ends and means still exists,

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There are biological necessity unsatisfied wants with regard both to nearer and to remoter

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periods of the future.

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There are always goods the procurement of which we must forgo because the way that leads

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to their production is too long and would prevent us from satisfying more urgent needs.

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The fact that we do not provide more amply for the future is the outcome of a weighing

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In such a world of perfect technological knowledge, a promoter drafts a plan A, according to which

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a hotel in picturesque but not easily accessible mountain districts and the roads leading to

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to it should be built.

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In examining the practicability of this plan, he discovers that the means available are

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not sufficient for its execution.

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Calculating the prospects of the profitability of the investment, he comes to the conclusion

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that the expected proceeds are not great enough to cover the costs of material and labor to

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be expended, and interest on the capital to be invested.

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He renounces the execution of Project A and embarks instead upon the realization of another

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plan, B. According to Plan B, the hotel is to be erected in a more easily accessible

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location which does not offer all the advantages of the picturesque landscape which Plan A

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had selected, but in which it can be built either with lower costs of construction or

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finished in a shorter time. If no interest on the capital invested were to enter into

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the calculation, the illusion could arise that the state of the market data, supply

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of capital goods, and the valuations of the public, allows for the execution of Plan A.

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However, the realization of Plan A would withdraw scarce factors of production from employments

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in which they could satisfy once considered more urgent by the consumers.

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It would mean a manifest malinvestment, a squandering of the means available.

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A lengthening of the period of production can increase the quantity of output per unit

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of input or produce goods which cannot be produced at all within a shorter period of

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production.

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But it is not true that the imputation of the value of this additional wealth to the

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capital goods required for the lengthening of the period of production generates interest.

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If one were to assume this, one would relapse into the crassest errors of the productivity

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approach, irrefutably exploded by Boehm-Bawerk.

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The contribution of the complementary factors of production to the result of the process

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is the reason for their being considered as valuable.

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It explains the prices paid for them and is fully taken into account in the determination

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of these prices.

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No residuum is left that is not accounted for and could explain interest.

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It has been asserted that in the imaginary construction of the evenly rotating economy,

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no interest would appear.

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However, it can be shown that this assertion is incompatible with the assumptions on which

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the construction of the evenly rotating economy is based.

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We begin with the distinction between two classes of saving, plain saving and capitalist

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saving.

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Plain saving is merely the piling up of consumers' goods for later consumption.

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Capitalist saving is the accumulation of goods which are designed for an improvement of production

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processes.

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The aim of plain saving is later consumption, it is merely postponement of consumption.

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Sooner or later the goods accumulated will be consumed and nothing will be left.

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The aim of capitalist saving is, first, an improvement in the productivity of effort.

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It accumulates capital goods which are employed for further production and are not merely

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reserves for later consumption.

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The boon derived from plain saving is later consumption of the stock not instantly consumed

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but accumulated for later use.

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The boon derived from capitalist saving is the increase of the quantity of goods produced

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or the production of goods which could not be produced at all without its aid.

227
00:21:42.620 --> 00:21:49.920
In constructing the image of an evenly rotating, static economy, economists disregard the process

228
00:21:49.920 --> 00:21:52.540
of capital accumulation.

229
00:21:52.540 --> 00:21:58.500
The capital goods are given and remain as, according to the underlying assumptions, no

230
00:21:58.500 --> 00:22:01.360
changes occur in the data.

231
00:22:01.360 --> 00:22:06.860
There is neither accumulation of new capital through saving, nor consumption of capital

232
00:22:06.860 --> 00:22:13.660
available through a surplus of consumption over income, that is, current production minus

233
00:22:13.660 --> 00:22:17.940
the funds required for the maintenance of capital.

234
00:22:17.940 --> 00:22:23.660
It is now our task to demonstrate that these assumptions are incompatible with the idea

235
00:22:23.660 --> 00:22:26.420
that there is no interest.

236
00:22:26.420 --> 00:22:31.460
There is no need to dwell in this reasoning upon plain saving.

237
00:22:31.460 --> 00:22:37.120
The objective of plain saving is to provide for a future in which the saver could possibly

238
00:22:37.120 --> 00:22:41.100
be less amply supplied than in the present.

239
00:22:41.100 --> 00:22:47.260
Yet one of the fundamental assumptions characterizing the imaginary construction of the evenly rotating

240
00:22:47.260 --> 00:22:53.740
economy is that the future does not differ at all from the present, that the actors are

241
00:22:53.740 --> 00:23:00.640
are fully aware of this fact and act accordingly, hence in the frame of this construction no

242
00:23:00.640 --> 00:23:05.480
room is left for the phenomenon of plain saving.

243
00:23:05.480 --> 00:23:12.460
It is different with the fruit of capitalist saving, the accumulated stock of capital goods.

244
00:23:12.460 --> 00:23:18.620
There is in the evenly rotating economy neither saving and accumulation of additional capital

245
00:23:18.620 --> 00:23:24.580
Capital Goods, Nor Eating Up of Already Existing Capital Goods.

246
00:23:24.580 --> 00:23:30.820
Both phenomena would amount to a change in the data and would thus disturb the even rotation

247
00:23:30.820 --> 00:23:33.440
of the imaginary system.

248
00:23:33.440 --> 00:23:40.760
Now the magnitude of saving and capital accumulation in the past, that is, in the period preceding

249
00:23:40.760 --> 00:23:47.380
the establishment of the evenly rotating economy, was adjusted to the height of the rate of

250
00:23:47.380 --> 00:23:54.200
If, with the establishment of the conditions of the evenly rotating economy, the owners

251
00:23:54.200 --> 00:24:00.600
of the capital goods were no longer to receive any interest, the conditions which were operative

252
00:24:00.600 --> 00:24:06.000
in the allocation of the available stocks of goods to the satisfaction of wants in the

253
00:24:06.000 --> 00:24:10.260
various periods of the future would be upset.

254
00:24:10.260 --> 00:24:18.320
The altered state of affairs requires a new allocation. Also, in the evenly rotating economy,

255
00:24:18.320 --> 00:24:25.820
the difference in the valuation of want satisfaction in various periods of the future cannot disappear.

256
00:24:25.820 --> 00:24:33.200
Also, in the frame of this imaginary construction, people will assign a higher value to an apple

257
00:24:33.200 --> 00:24:45.880
If the capitalist no longer receives interest, the balance between satisfaction in nearer

258
00:24:45.880 --> 00:24:50.520
and remoter periods of the future is disarranged.

259
00:24:50.520 --> 00:24:57.560
The fact that a capitalist has maintained his capital at just $100,000 was conditioned

260
00:24:57.560 --> 00:25:05.920
by the fact that $100,000 present dollars were equal to $105,000 available 12 months

261
00:25:05.920 --> 00:25:07.800
later.

262
00:25:07.800 --> 00:25:14.480
These $5,000 were, in his eyes, sufficient to outweigh the advantages to be expected

263
00:25:14.480 --> 00:25:19.360
from an instantaneous consumption of a part of this sum.

264
00:25:19.360 --> 00:25:25.020
If interest payments are eliminated, capital consumption ensues.

265
00:25:25.020 --> 00:25:31.100
This is the essential deficiency of the static system as Schumpeter depicts it.

266
00:25:31.100 --> 00:25:37.000
It is not sufficient to assume that the capital equipment of such a system has been accumulated

267
00:25:37.000 --> 00:25:43.500
in the past, that it is now available to the extent of this previous accumulation and is

268
00:25:43.500 --> 00:25:48.340
henceforth unalterably maintained at this level.

269
00:25:48.340 --> 00:25:54.820
We must also assign in the frame of this imaginary system a role to the operation of forces which

270
00:25:54.820 --> 00:25:57.820
which bring about such a maintenance.

271
00:25:57.820 --> 00:26:04.380
If one eliminates the capitalist's role as receiver of interest, one replaces it by the

272
00:26:04.380 --> 00:26:07.900
capitalist's role as consumer of capital.

273
00:26:07.900 --> 00:26:13.720
There is no longer any reason why the owner of capital goods should abstain from employing

274
00:26:13.720 --> 00:26:16.140
them for consumption.

275
00:26:16.140 --> 00:26:21.860
Under the assumption implied in the imaginary construction of static conditions, the evenly

276
00:26:21.860 --> 00:26:28.180
and the Rotating Economy, there is no need to keep them in reserve for rainy days.

277
00:26:28.180 --> 00:26:34.180
But even if, inconsistently enough, we were to assume that a part of them is devoted to

278
00:26:34.180 --> 00:26:40.380
this purpose, and therefore withheld from current consumption, at least that part of

279
00:26:40.380 --> 00:26:46.720
capital will be consumed, which corresponds to the amount that capitalist saving exceeds

280
00:26:46.720 --> 00:26:49.080
plain saving.

281
00:26:49.080 --> 00:26:56.080
If there were no originary interest, capital goods would not be devoted to immediate consumption,

282
00:26:56.080 --> 00:26:59.040
and capital would not be consumed.

283
00:26:59.040 --> 00:27:04.700
On the contrary, under such an unthinkable and unimaginable state of affairs, there would

284
00:27:04.700 --> 00:27:12.880
be no consumption at all, but only saving, accumulation of capital and investment.

285
00:27:12.880 --> 00:27:18.480
Not the impossible disappearance of originary interest, but the abolition of payment of

286
00:27:18.480 --> 00:27:24.160
of Interest to the Owners of Capital would result in capital consumption.

287
00:27:24.160 --> 00:27:29.720
The capitalists would consume their capital goods and their capital precisely because

288
00:27:29.720 --> 00:27:37.440
there is originary interest and present-want satisfaction is preferred to later satisfaction.

289
00:27:37.440 --> 00:27:44.920
Therefore, there cannot be any question of abolishing interest by any institutions, laws

290
00:27:44.920 --> 00:27:48.260
and devices of bank manipulation.

291
00:27:48.260 --> 00:27:54.260
He who wants to abolish interest will have to induce people to value an apple available

292
00:27:54.260 --> 00:27:58.860
in a hundred years, no less than a present apple.

293
00:27:58.860 --> 00:28:04.420
What can be abolished by laws and decrees is merely the right of the capitalists to

294
00:28:04.420 --> 00:28:06.560
receive interest.

295
00:28:06.560 --> 00:28:13.020
But such laws would bring about capital consumption and would very soon throw mankind back into

296
00:28:13.020 --> 00:28:16.820
the original state of natural poverty.

297
00:28:16.820 --> 00:28:22.220
3. The Height of Interest Rates

298
00:28:22.220 --> 00:28:28.500
In plain saving and in the capitalist saving of isolated economic actors, the difference

299
00:28:28.500 --> 00:28:35.060
in the valuation of once satisfaction in various periods of the future manifests itself in

300
00:28:35.060 --> 00:28:42.000
the extent to which people provide, in a more ample way, for nearer than for remoter periods

301
00:28:42.000 --> 00:28:44.120
of the future.

302
00:28:44.120 --> 00:28:49.580
Under the conditions of a market economy, the rate of originary interest is, provided

303
00:28:49.580 --> 00:28:56.320
the assumptions involved in the imaginary construction of the evenly rotating economy are present,

304
00:28:56.320 --> 00:29:02.460
equal to the ratio of a definite amount of money available today and the amount available

305
00:29:02.460 --> 00:29:07.160
at a later date which is considered as its equivalent.

306
00:29:07.160 --> 00:29:13.280
The rate of originary interest directs the investment activities of the entrepreneurs.

307
00:29:13.280 --> 00:29:18.820
determines the length of waiting time and of the period of production in every branch

308
00:29:18.820 --> 00:29:21.260
of industry.

309
00:29:21.260 --> 00:29:27.960
People often raise the question of which rate of interest, a high or a low, stimulates saving

310
00:29:27.960 --> 00:29:32.560
and capital accumulation more, and which less.

311
00:29:32.560 --> 00:29:34.920
The question makes no sense.

312
00:29:34.920 --> 00:29:40.880
The lower the discount attached to future goods is, the lower is the rate of originary

313
00:29:40.880 --> 00:29:42.080
interest.

314
00:29:42.080 --> 00:29:47.780
People do not save more because the rate of originary interest rises, and the rate of

315
00:29:47.780 --> 00:29:54.400
originary interest does not drop on account of an increase in the amount of saving.

316
00:29:54.400 --> 00:30:00.280
Changes in the originary rates of interest and in the amount of saving are, other things,

317
00:30:00.280 --> 00:30:07.480
especially the institutional conditions, being equal, two aspects of the same phenomenon.

318
00:30:07.480 --> 00:30:13.880
The disappearance of originary interest would be tantamount to the disappearance of consumption.

319
00:30:13.880 --> 00:30:19.540
The increase of originary interest beyond all measure would be tantamount to the disappearance

320
00:30:19.540 --> 00:30:24.000
of saving and any provision for the future.

321
00:30:24.000 --> 00:30:30.240
The quantity of the available supply of capital goods influences neither the rate of originary

322
00:30:30.240 --> 00:30:34.480
interest nor the amount of further saving.

323
00:30:34.480 --> 00:30:40.120
Even the most plentiful supply of capital need not necessarily bring about either a

324
00:30:40.120 --> 00:30:46.720
lowering of the rate of originary interest or a drop in the propensity to save.

325
00:30:46.720 --> 00:30:52.900
The increase in capital accumulation and the per capita quota of capital invested, which

326
00:30:52.900 --> 00:30:59.500
is a characteristic mark of economically advanced nations, does not necessarily either lower

327
00:30:59.500 --> 00:31:05.540
over the rate of originary interest or weaken the propensity of individuals to make additional

328
00:31:05.540 --> 00:31:07.380
savings.

329
00:31:07.380 --> 00:31:13.220
People are, in dealing with these problems, for the most part misled by comparing merely

330
00:31:13.220 --> 00:31:18.300
the market rates of interest as they are determined on the loan market.

331
00:31:18.300 --> 00:31:25.240
However, these gross rates are not merely expressive of the height of originary interest.

332
00:31:25.240 --> 00:31:31.640
They contain, as will be shown later, other elements besides, the effect of which accounts

333
00:31:31.640 --> 00:31:37.280
for the fact that the gross rates are, as a rule, higher in poorer countries than in

334
00:31:37.280 --> 00:31:39.520
richer ones.

335
00:31:39.520 --> 00:31:45.480
It is generally asserted that, other things being equal, the better individuals are supplied

336
00:31:45.480 --> 00:31:51.120
for the immediate future, the better they provide for once for the remoter future.

337
00:31:51.120 --> 00:32:04.120
Consequently, it is said, the amount of total saving and capital accumulation within an economic system depends on the arrangement of the population into groups of different income levels.

338
00:32:04.120 --> 00:32:15.120
In a society with approximate income equality there is, it is said, less saving than in a society in which there is more inequality.

339
00:32:15.120 --> 00:32:19.120
There is a grain of truth in such observations.

340
00:32:19.120 --> 00:32:25.800
However, they are statements about psychological facts, and as such lack the universal validity

341
00:32:25.800 --> 00:32:30.240
and necessity inherent in praxeological statements.

342
00:32:30.240 --> 00:32:36.840
Moreover, the other things, the equality of which they presuppose, comprehend the various

343
00:32:36.840 --> 00:32:43.760
individuals' valuations, their subjective value judgments in weighing the pros and cons

344
00:32:43.760 --> 00:32:49.060
of immediate consumption and of postponement of consumption.

345
00:32:49.060 --> 00:32:54.420
There are certainly many individuals whose behavior they describe correctly, but there

346
00:32:54.420 --> 00:32:58.980
also are other individuals who act in a different way.

347
00:32:58.980 --> 00:33:04.500
The French peasants, although for the most part people of moderate wealth and income,

348
00:33:04.500 --> 00:33:10.300
were in the 19th century widely known for their parsimonious habits, while the wealthy

349
00:33:10.300 --> 00:33:16.900
members of the aristocracy and the heirs of huge fortunes amassed in commerce and industry

350
00:33:16.900 --> 00:33:23.600
were no less renowned for their profligacy. It is therefore impossible to formulate any

351
00:33:23.600 --> 00:33:29.100
praxeological theorem concerning the relation of the amount of capital available in the

352
00:33:29.100 --> 00:33:35.680
whole nation or to individual people on the one hand, and the amount of saving or capital

353
00:33:35.680 --> 00:33:42.300
consumption and the height of the originary rate of interest on the other hand. The allocation

354
00:33:42.300 --> 00:33:48.460
Description of scarce resources to want satisfaction in various periods of the future is determined

355
00:33:48.460 --> 00:33:55.720
by value judgments and indirectly by all those factors which constitute the individuality

356
00:33:55.720 --> 00:33:58.460
of the acting man.

357
00:33:58.460 --> 00:34:00.820
4.

358
00:34:00.820 --> 00:34:04.880
ORIGINARY INTEREST IN THE CHANGING ECONOMY

359
00:34:04.880 --> 00:34:10.580
So far, we have dealt with the problem of originary interest under certain assumptions,

360
00:34:10.580 --> 00:34:16.940
that the turnover of goods is affected by the employment of neutral money, that saving,

361
00:34:16.940 --> 00:34:22.340
capital accumulation and the determination of interest rates are not hampered by institutional

362
00:34:22.340 --> 00:34:29.340
obstacles, and that the whole economic process goes on in the frame of an evenly rotating

363
00:34:29.340 --> 00:34:30.820
economy.

364
00:34:30.820 --> 00:34:35.900
We shall eliminate the first two of these assumptions in the following chapter.

365
00:34:35.900 --> 00:34:41.900
Now we want to deal with originary interest in a changing economy.

366
00:34:41.900 --> 00:34:47.940
He who wants to provide for the satisfaction of future needs must correctly anticipate

367
00:34:47.940 --> 00:34:49.600
these needs.

368
00:34:49.600 --> 00:34:55.460
If he fails in this understanding of the future, his provision will prove less satisfactory

369
00:34:55.460 --> 00:34:57.900
or totally futile.

370
00:34:57.900 --> 00:35:03.980
There is no such thing as an abstract saving that could provide for all classes of want

371
00:35:03.980 --> 00:35:12.420
satisfaction and would be neutral with regard to changes occurring in conditions and valuations.

372
00:35:12.420 --> 00:35:20.260
Originary interest can therefore in the changing economy never appear in a pure unalloyed form.

373
00:35:20.260 --> 00:35:25.780
It is only in the imaginary construction of the evenly rotating economy that the mere

374
00:35:25.780 --> 00:35:30.600
passing of time matures originary interest.

375
00:35:30.600 --> 00:35:36.580
In the passage of time, and with the progress of the process of production, more and more

376
00:35:36.580 --> 00:35:42.160
value accrues, as it were, to the complementary factors of production.

377
00:35:42.160 --> 00:35:47.740
With the termination of the process of production, the lapse of time has generated in the price

378
00:35:47.740 --> 00:35:52.740
of the product the full quota of originary interest.

379
00:35:52.740 --> 00:35:58.980
In the changing economy during the period of production, there also arise, synchronously,

380
00:35:58.980 --> 00:36:02.020
Other Changes in Valuations

381
00:36:02.020 --> 00:36:06.660
Some goods are valued higher than previously, some lower.

382
00:36:06.660 --> 00:36:13.440
These alterations are the source from which entrepreneurial profits and losses stem.

383
00:36:13.440 --> 00:36:19.180
Only those entrepreneurs who, in their planning, have correctly anticipated the future state

384
00:36:19.180 --> 00:36:24.980
of the market, are in a position to reap, in selling the products, an excess over the

385
00:36:24.980 --> 00:36:31.220
The Costs of Production, Inclusive of Net Originary Interest, Expended

386
00:36:31.220 --> 00:36:37.540
An entrepreneur who has failed in his speculative understanding of the future can sell his products,

387
00:36:37.540 --> 00:36:44.140
if at all, only at prices which do not cover completely his expenditures, plus originary

388
00:36:44.140 --> 00:36:47.780
interest on the capital invested.

389
00:36:47.780 --> 00:36:54.340
Like entrepreneurial profit and loss, interest is not a price, but a magnitude which is to

390
00:36:54.340 --> 00:37:01.140
to be disengaged by a particular mode of computation from the price of the products of successful

391
00:37:01.140 --> 00:37:03.740
business operations.

392
00:37:03.740 --> 00:37:09.300
The gross difference between the price at which a commodity is sold and the costs expended

393
00:37:09.300 --> 00:37:15.820
in its production, exclusive of interest on the capital invested, was called profit in

394
00:37:15.820 --> 00:37:20.260
the terminology of British classical economics.

395
00:37:20.260 --> 00:37:27.580
In economics conceives this magnitude as a complex of catallactically disparate items.

396
00:37:27.580 --> 00:37:35.220
The excess of gross receipts over expenditures, which the classical economists called profit,

397
00:37:35.220 --> 00:37:41.940
includes the price for the entrepreneur's own labor employed in the process of production,

398
00:37:41.940 --> 00:37:48.820
interest on the capital invested, and, finally, entrepreneurial profit proper.

399
00:37:48.820 --> 00:37:54.340
If such an excess has not been reaped at all in the sale of the products, the entrepreneur

400
00:37:54.340 --> 00:38:00.820
not only fails to get profit proper, he receives neither an equivalent for the market value

401
00:38:00.820 --> 00:38:07.100
of the labor he has contributed nor interest on the capital invested.

402
00:38:07.100 --> 00:38:14.340
The breaking down of gross profit in the classical sense of the term into managerial wages, interest

403
00:38:14.340 --> 00:38:20.520
and Entrepreneurial Profit is not merely a device of economic theory.

404
00:38:20.520 --> 00:38:26.860
It developed with progressing perfection in business practices of accountancy and calculation

405
00:38:26.860 --> 00:38:33.580
in the field of commercial routine independently of the reasoning of the economists.

406
00:38:33.580 --> 00:38:39.940
The judicious and sensible businessman does not attach practical significance to the confused

407
00:38:39.940 --> 00:38:52.180
His notion of costs of production includes the potential market price of his own services

408
00:38:52.180 --> 00:38:58.420
contributed, the interest paid on capital borrowed, and the potential interest he could

409
00:38:58.420 --> 00:39:04.760
earn, according to the conditions of the market, on his own capital invested in the enterprise

410
00:39:04.760 --> 00:39:07.900
by lending it to other people.

411
00:39:07.900 --> 00:39:15.220
Only the excess of proceeds over the costs so calculated is, in his eyes, entrepreneurial

412
00:39:15.220 --> 00:39:16.660
profit.

413
00:39:16.660 --> 00:39:22.780
But of course the present-day intentional confusion of all economic concepts is conducive

414
00:39:22.780 --> 00:39:25.020
to obscuring this distinction.

415
00:39:25.020 --> 00:39:30.940
Thus, in the United States, in dealing with the dividends paid by corporations, people

416
00:39:30.940 --> 00:39:33.700
speak of profits.

417
00:39:33.700 --> 00:39:39.940
The precipitation of entrepreneurial wages from the complex of all the other items included

418
00:39:39.940 --> 00:39:46.500
in the profit concept of classical economics presents no particular problem.

419
00:39:46.500 --> 00:39:52.720
It is more difficult to sunder entrepreneurial profit from originary interest.

420
00:39:52.720 --> 00:39:59.720
In the changing economy, interest stipulated in loan contracts is always a gross magnitude

421
00:39:59.720 --> 00:40:06.440
Out of which the pure rate of originary interest must be computed by a particular process of

422
00:40:06.440 --> 00:40:11.080
computation and analytical repartition.

423
00:40:11.080 --> 00:40:16.760
It has been shown already that in every act of lending, even apart from the problem of

424
00:40:16.760 --> 00:40:23.920
changes in the monetary unit's purchasing power, there is an element of entrepreneurial venture.

425
00:40:23.920 --> 00:40:29.680
The granting of credit is necessarily always an entrepreneurial speculation, which can

426
00:40:29.680 --> 00:40:36.840
possibly result in failure and the loss of a part or of the total amount lent.

427
00:40:36.840 --> 00:40:43.560
Every interest stipulated and paid in loans includes not only originary interest but also

428
00:40:43.560 --> 00:40:46.440
entrepreneurial profit.

429
00:40:46.440 --> 00:40:53.380
This fact for a long time misled the attempts to construct a satisfactory theory of interest.

430
00:40:53.380 --> 00:40:59.540
It was only the elaboration of the imaginary construction of the evenly rotating economy

431
00:40:59.540 --> 00:41:06.060
that made it possible to distinguish precisely between originary interest and entrepreneurial

432
00:41:06.060 --> 00:41:08.500
profit and loss.

433
00:41:08.500 --> 00:41:10.140
5.

434
00:41:10.140 --> 00:41:14.120
The Computation of Interest

435
00:41:14.120 --> 00:41:20.820
Originary interest is the outgrowth of valuations unceasingly fluctuating and changing.

436
00:41:20.820 --> 00:41:28.360
fluctuates and changes with them. The custom of computing interest pro-ano is merely commercial

437
00:41:28.360 --> 00:41:34.380
usage and a convenient rule of reckoning. It does not affect the height of the interest

438
00:41:34.380 --> 00:41:41.900
rates as determined by the market. The activities of the entrepreneurs tend toward the establishment

439
00:41:41.900 --> 00:41:48.780
of a uniform rate of originary interest in the whole market economy. If there turns up

440
00:41:48.780 --> 00:41:54.780
Up in one sector of the market, a margin between the prices of present goods and those of future

441
00:41:54.780 --> 00:42:01.700
goods, which deviates from the margin prevailing in other sectors, a trend toward equalization

442
00:42:01.700 --> 00:42:07.780
is brought about by the striving of businessmen to enter those sectors in which this margin

443
00:42:07.780 --> 00:42:12.440
is higher, and to avoid those in which it is lower.

444
00:42:12.440 --> 00:42:18.280
The final rate of originary interest is the same in all parts of the market of the evenly

445
00:42:18.280 --> 00:42:21.120
and the Rotating Economy.

446
00:42:21.120 --> 00:42:27.300
The valuations resulting in the emergence of originary interest prefer satisfaction in

447
00:42:27.300 --> 00:42:34.100
a nearer period of the future to satisfaction of the same kind and extent in a remoter period

448
00:42:34.100 --> 00:42:36.160
of the future.

449
00:42:36.160 --> 00:42:41.280
Nothing would justify the assumption that this discounting of satisfaction in remoter

450
00:42:41.280 --> 00:42:46.120
periods progresses continuously and evenly.

451
00:42:46.120 --> 00:42:52.000
If we were to assume this, we would imply that the period of provision is infinite.

452
00:42:52.000 --> 00:42:58.680
However, the mere fact that individuals differ in their provision for future needs, and that

453
00:42:58.680 --> 00:43:05.920
even to the most provident actor, provision beyond a definite period appears supererogatory,

454
00:43:05.920 --> 00:43:10.980
forbids us to think of the period of provision as infinite.

455
00:43:10.980 --> 00:43:15.060
The usages of the loan market must not mislead us.

456
00:43:15.060 --> 00:43:20.740
It is customary to stipulate a uniform rate of interest for the whole duration of a loan

457
00:43:20.740 --> 00:43:27.300
contract and to apply a uniform rate in computing compound interest.

458
00:43:27.300 --> 00:43:32.820
The real determination of interest rates is independent of these and other arithmetical

459
00:43:32.820 --> 00:43:36.340
devices of interest computation.

460
00:43:36.340 --> 00:43:42.620
If the rate of interest is unalterably fixed by contract for a period of time, intervening

461
00:43:42.620 --> 00:43:47.960
Unchanging changes in the market rate of interest are reflected in corresponding changes in

462
00:43:47.960 --> 00:43:53.840
the prices paid for the principal, due allowance being made for the fact that the amount of

463
00:43:53.840 --> 00:44:00.760
principal to be paid back at the maturity of the loan is unalterably stipulated.

464
00:44:00.760 --> 00:44:06.280
It does not affect the result whether one calculates with an unchanging rate of interest

465
00:44:06.280 --> 00:44:12.960
and changing prices of the principal, or with changing interest rates and an unchanging amount

466
00:44:12.960 --> 00:44:18.240
of the principal, or with changes in both magnitudes.

467
00:44:18.240 --> 00:44:24.800
The terms of a loan contract are not independent of the stipulated duration of the loan.

468
00:44:24.800 --> 00:44:30.220
Not only because those components of the gross rate of market interest which made it deviate

469
00:44:30.220 --> 00:44:36.160
from the rate of originary interest are affected by differences in the duration of the loan,

470
00:44:36.160 --> 00:44:42.160
but also on account of factors which bring about changes in the rate of originary interest.

471
00:44:42.160 --> 00:44:50.160
Loan contracts are valued and appraised differently according to the duration of the loan stipulated.