WEBVTT NOTE 6.05. Time Preference, Capitalists, and Individual Money Stock 1 00:00:00.000 --> 00:00:07.200 5. Time Preference, Capitalists and Individual Money Stock 2 00:00:07.200 --> 00:00:13.380 When we state that the time preference schedules of all individuals in the society determine 3 00:00:13.380 --> 00:00:20.720 the interest rate and the proportion of savings to consumption, we mean all individuals, and 4 00:00:20.720 --> 00:00:27.760 not some sort of separate class called capitalists. There is a temptation since the production 5 00:00:27.760 --> 00:00:35.360 Human structure is analyzed in terms of different classes, landowners, laborers and capitalists, 6 00:00:35.360 --> 00:00:42.600 to conclude that there are three definite stratified groups of people in society corresponding 7 00:00:42.600 --> 00:00:44.480 to these classifications. 8 00:00:44.480 --> 00:00:51.200 Actually, in economic analysis of the market, we are concerned with functions rather than 9 00:00:51.200 --> 00:00:53.880 whole persons per se. 10 00:00:53.880 --> 00:01:00.800 In reality, there is no special class of capitalists set off from laborers and landowners. 11 00:01:00.800 --> 00:01:07.520 This is not simply due to the trite fact that even capitalists must also be consumers. 12 00:01:07.520 --> 00:01:14.720 It is also due to the more important fact that all consumers can be capitalists if they 13 00:01:14.720 --> 00:01:15.720 wish. 14 00:01:15.720 --> 00:01:21.360 They will be capitalists if their time preference schedules so dictate. 15 00:01:21.360 --> 00:01:26.980 At the equilibrium rate of interest on the market, some individuals will be suppliers 16 00:01:26.980 --> 00:01:34.140 of present goods, some will be demanders, others will not be in the time market at all. 17 00:01:34.140 --> 00:01:40.880 Those whose time preference schedules at this rate permit them to be suppliers will be the 18 00:01:40.880 --> 00:01:45.540 savers, that is, they will be the capitalists. 19 00:01:45.540 --> 00:01:50.820 The role of the capitalists will be clarified if we ask the question, where did they get 20 00:01:50.820 --> 00:01:57.060 the money that they save and invest. First, they may have obtained it in what we might call 21 00:01:57.060 --> 00:02:02.660 current production. That is, they could have received the money in their current capacities 22 00:02:02.660 --> 00:02:09.460 as laborers, landowners and capitalists. After they receive the money, they must then decide 23 00:02:09.460 --> 00:02:15.860 how to allocate it among various lines of goods and between consumption and investment. 24 00:02:15.860 --> 00:02:22.660 Secondly, the source of funds could have been money earned in past rounds of production, 25 00:02:22.660 --> 00:02:26.980 and previously hoarded, now being dishoarded. 26 00:02:26.980 --> 00:02:32.900 We are, however, leaving out hoarding and dishoarding at this stage in the analysis. 27 00:02:32.900 --> 00:02:39.300 The only other source, the third source, is new money, and this too will be discussed 28 00:02:39.300 --> 00:02:40.540 later. 29 00:02:40.540 --> 00:02:45.420 For the moment, therefore, we shall consider that the money from which savings derive could 30 00:02:45.420 --> 00:02:49.780 would only have come from recent earnings from production. 31 00:02:49.780 --> 00:02:56.300 Some earnings were obtained as capitalists and some as owners of original factors. 32 00:02:56.300 --> 00:03:00.500 The listener might here have detected an apparent paradox. 33 00:03:00.500 --> 00:03:06.700 How can a laborer or a landowner be a demander of present goods and then turn around and 34 00:03:06.700 --> 00:03:10.580 be a supplier of present goods for investment? 35 00:03:10.580 --> 00:03:16.140 This seems to be particularly puzzling since we have stated that one cannot be a demander 36 00:03:16.140 --> 00:03:22.940 and a supplier of present goods at the same time, that one's time preference schedule 37 00:03:22.940 --> 00:03:28.020 may put one in one camp or the other, but not in both. 38 00:03:28.020 --> 00:03:34.420 The solution to this puzzle is that the two acts are not performed at the same time, even 39 00:03:34.420 --> 00:03:40.500 Even though both are performed to the same extent in their turn in the endless round 40 00:03:40.500 --> 00:03:44.460 of the evenly rotating economy. 41 00:03:44.460 --> 00:03:50.220 Given his time preference schedule, he is bound to be in a greater supply position the 42 00:03:50.220 --> 00:03:56.340 more money he has, and in more of a demand position the less money he has. 43 00:03:56.340 --> 00:04:02.700 Before the laborer or landowner sells his services, he has a certain money stock, a 44 00:04:02.700 --> 00:04:32.700 The Theory of Money and Credit 45 00:04:32.700 --> 00:04:38.700 The Theory of Money and Credit 46 00:05:02.700 --> 00:05:08.780 of Origin of his decision to allocate his money income shifts so that he might well 47 00:05:08.780 --> 00:05:12.220 become a supplier out of his income. 48 00:05:12.220 --> 00:05:18.300 Of course in many cases he is still a demander, or is not on the time market at all. 49 00:05:18.300 --> 00:05:24.020 To coin a phrase to distinguish these two positions, we may call his original condition 50 00:05:24.020 --> 00:05:31.900 a pre-income position, before he has sold his services for money, and the latter a post-income 51 00:05:31.900 --> 00:05:48.340 We have seen that a landowner's pre-income demand for money is likely to be practically 52 00:05:48.340 --> 00:05:54.060 inelastic, while a laborer's will probably be more elastic. 53 00:05:54.060 --> 00:06:00.540 Some individuals in a post-income position will be suppliers at the market rate of interest. 54 00:06:00.540 --> 00:06:04.380 Some will be demanders, some will be neutral. 55 00:06:04.380 --> 00:06:10.320 We conclude that any man can be a capitalist if only he wants to be. 56 00:06:10.320 --> 00:06:16.340 He can derive his funds solely from the fruits of previous capitalist investment, or from 57 00:06:16.340 --> 00:06:23.820 past hoarded cash balances, or solely from his income as a laborer or a landowner. 58 00:06:23.820 --> 00:06:28.820 He can, of course, derive his funds from several of these sources. 59 00:06:28.820 --> 00:06:35.300 The only thing that stops a man from being a capitalist is his own high time preference 60 00:06:35.300 --> 00:06:42.500 scale, in other words, his stronger desire to consume goods in the present. 61 00:06:42.500 --> 00:06:48.380 Marxists and others who postulate a rigid stratification, a virtual caste structure 62 00:06:48.380 --> 00:06:51.620 in society, are in grave error. 63 00:06:51.620 --> 00:06:58.800 The same person can be, at once, a labourer, a landowner and a capitalist in the same period 64 00:06:58.800 --> 00:07:00.520 of Time. 65 00:07:00.520 --> 00:07:08.080 This Marxian error stemmed from a very similar error introduced into economics by Adam Smith. 66 00:07:08.080 --> 00:07:14.020 It might be argued that only the rich can afford to be capitalists, that is, those who 67 00:07:14.020 --> 00:07:17.000 have a greater amount of money stock. 68 00:07:17.000 --> 00:07:23.640 This argument has superficial plausibility since we have seen that for any given individual 69 00:07:23.640 --> 00:07:29.760 and a given time preference schedule, a greater money stock will lead to a greater supply 70 00:07:29.760 --> 00:07:36.120 of savings and a lesser money stock to a lesser supply of savings. 71 00:07:36.120 --> 00:07:42.720 Ceteris Paribus the same applies to changes in money income which constitute additions 72 00:07:42.720 --> 00:07:44.160 to stock. 73 00:07:44.160 --> 00:07:52.960 We cannot however assume that a man with post-income assets of 10,000 ounces of gold will necessarily 74 00:07:52.960 --> 00:07:57.660 Save more than a man with 100 ounces of gold. 75 00:07:57.660 --> 00:08:05.380 We cannot compare time preferences interpersonally, any more than we can formulate interpersonal 76 00:08:05.380 --> 00:08:09.180 laws for any other type of utilities. 77 00:08:09.180 --> 00:08:15.540 What we can assert as an economic law for one person, we cannot assert in comparing 78 00:08:15.540 --> 00:08:17.740 two or more persons. 79 00:08:17.740 --> 00:08:24.380 Each person has his own time preference schedule, apart from the specific size of his monetary 80 00:08:24.380 --> 00:08:25.460 stock. 81 00:08:25.460 --> 00:08:31.100 Each person's time preference schedule, as with any other element in his value scale, 82 00:08:31.100 --> 00:08:33.900 is entirely of his own making. 83 00:08:33.900 --> 00:08:39.440 All of us have heard of the proverbially thrifty French peasant compared with the rich playboy 84 00:08:39.440 --> 00:08:42.180 who is always running into debt. 85 00:08:42.180 --> 00:08:48.360 The common sense observation that it is generally the rich who save more may be an interesting 86 00:08:48.360 --> 00:08:54.980 historical judgment, but it furnishes us with no scientific economic law whatever, 87 00:08:54.980 --> 00:08:59.940 and the purpose of economic science is to furnish us with such laws. 88 00:08:59.940 --> 00:09:06.200 As long as a person has any money at all, and he must have some money if he participates 89 00:09:06.200 --> 00:09:11.200 In the market society, to any extent, he can be a capitalist.