5. Time Preference, Capitalists and Individual Money Stock
When we state that the time preference schedules of all individuals in the society determine
the interest rate and the proportion of savings to consumption, we mean all individuals, and
not some sort of separate class called capitalists. There is a temptation since the production
Human structure is analyzed in terms of different classes, landowners, laborers and capitalists,
to conclude that there are three definite stratified groups of people in society corresponding
to these classifications.
Actually, in economic analysis of the market, we are concerned with functions rather than
whole persons per se.
In reality, there is no special class of capitalists set off from laborers and landowners.
This is not simply due to the trite fact that even capitalists must also be consumers.
It is also due to the more important fact that all consumers can be capitalists if they
wish.
They will be capitalists if their time preference schedules so dictate.
At the equilibrium rate of interest on the market, some individuals will be suppliers
of present goods, some will be demanders, others will not be in the time market at all.
Those whose time preference schedules at this rate permit them to be suppliers will be the
savers, that is, they will be the capitalists.
The role of the capitalists will be clarified if we ask the question, where did they get
the money that they save and invest. First, they may have obtained it in what we might call
current production. That is, they could have received the money in their current capacities
as laborers, landowners and capitalists. After they receive the money, they must then decide
how to allocate it among various lines of goods and between consumption and investment.
Secondly, the source of funds could have been money earned in past rounds of production,
and previously hoarded, now being dishoarded.
We are, however, leaving out hoarding and dishoarding at this stage in the analysis.
The only other source, the third source, is new money, and this too will be discussed
later.
For the moment, therefore, we shall consider that the money from which savings derive could
would only have come from recent earnings from production.
Some earnings were obtained as capitalists and some as owners of original factors.
The listener might here have detected an apparent paradox.
How can a laborer or a landowner be a demander of present goods and then turn around and
be a supplier of present goods for investment?
This seems to be particularly puzzling since we have stated that one cannot be a demander
and a supplier of present goods at the same time, that one's time preference schedule
may put one in one camp or the other, but not in both.
The solution to this puzzle is that the two acts are not performed at the same time, even
Even though both are performed to the same extent in their turn in the endless round
of the evenly rotating economy.
Given his time preference schedule, he is bound to be in a greater supply position the
more money he has, and in more of a demand position the less money he has.
Before the laborer or landowner sells his services, he has a certain money stock, a
The Theory of Money and Credit
of Origin of his decision to allocate his money income shifts so that he might well
become a supplier out of his income.
Of course in many cases he is still a demander, or is not on the time market at all.
To coin a phrase to distinguish these two positions, we may call his original condition
a pre-income position, before he has sold his services for money, and the latter a post-income
We have seen that a landowner's pre-income demand for money is likely to be practically
inelastic, while a laborer's will probably be more elastic.
Some individuals in a post-income position will be suppliers at the market rate of interest.
Some will be demanders, some will be neutral.
We conclude that any man can be a capitalist if only he wants to be.
He can derive his funds solely from the fruits of previous capitalist investment, or from
past hoarded cash balances, or solely from his income as a laborer or a landowner.
He can, of course, derive his funds from several of these sources.
The only thing that stops a man from being a capitalist is his own high time preference
scale, in other words, his stronger desire to consume goods in the present.
Marxists and others who postulate a rigid stratification, a virtual caste structure
in society, are in grave error.
The same person can be, at once, a labourer, a landowner and a capitalist in the same period
of Time.
This Marxian error stemmed from a very similar error introduced into economics by Adam Smith.
It might be argued that only the rich can afford to be capitalists, that is, those who
have a greater amount of money stock.
This argument has superficial plausibility since we have seen that for any given individual
and a given time preference schedule, a greater money stock will lead to a greater supply
of savings and a lesser money stock to a lesser supply of savings.
Ceteris Paribus the same applies to changes in money income which constitute additions
to stock.
We cannot however assume that a man with post-income assets of 10,000 ounces of gold will necessarily
Save more than a man with 100 ounces of gold.
We cannot compare time preferences interpersonally, any more than we can formulate interpersonal
laws for any other type of utilities.
What we can assert as an economic law for one person, we cannot assert in comparing
two or more persons.
Each person has his own time preference schedule, apart from the specific size of his monetary
stock.
Each person's time preference schedule, as with any other element in his value scale,
is entirely of his own making.
All of us have heard of the proverbially thrifty French peasant compared with the rich playboy
who is always running into debt.
The common sense observation that it is generally the rich who save more may be an interesting
historical judgment, but it furnishes us with no scientific economic law whatever,
and the purpose of economic science is to furnish us with such laws.
As long as a person has any money at all, and he must have some money if he participates
In the market society, to any extent, he can be a capitalist.