6. The Post-Income Demanders
Up to this point, we have analyzed the time market demand for present goods by landowners
and laborers, as well as the derived demand by capitalists. This aggregate demand we may
call the producer's demand for present goods on the time market. This is the demand by
by those who are selling their services or the services of their owned property in the
advancing of production.
This demand is all pre-income demand as we have defined it.
That is, it takes place prior to the acquisition of money income from the productive system.
It is all in the form of selling factor services, future goods, in exchange for present money.
But there is another component of net demand for present goods on the time market.
This is the post-income component.
It is a demand that takes place even after productive income is acquired.
Clearly, this demand cannot be a productive demand, since owners of future goods used
in production exercise that demand prior to their sale.
It is, on the contrary, a consumer's demand.
This subdivision of the time market operates as follows.
Jones sells 100 ounces of future money, say one year from now, to Smith in exchange for
95 ounces of present money.
This future money is not in the form of an expectation created by a factor of production.
Instead, it is an IOU by Jones, promising to pay 100 ounces of money at a point one year in the future.
He exchanges this claim on future money for present money, 95 ounces.
The discount on future money as compared with present money is precisely equivalent to that in the other parts of the time market that we have studied heretofore,
4, except that the present case is more obvious.
The rate of interest finally set on the market is determined by the aggregate net supply
and net demand schedules throughout the entire time market, and these, as we have seen, are
determined by the time preferences of all the individuals on the market.
The net borrowers, then, are people who have relatively higher time preference rates than
and others at the going rate of interest, in fact, so high that they will borrow certain
amounts at this rate.
It must be emphasized here that we are dealing only with consumption borrowing, borrowing
to add to the present use of Jones money stock for consumption.
Jones' sale of future money differs from the sales of the landowners and laborers in
another respect.
Their transactions are completed, while Jones has not yet completed his.
His IOU establishes a claim to future money on the part of the buyer, or lender, Smith.
And Smith, to complete his transaction and earn his interest payment, must present his
note at the later date and claim the money due.
In sum, the time markets components are as follows 1. Supply of present goods for future
goods, the savings of all 2. Demand for present goods by suppliers
of future goods a. Producers demand, landowners, laborers
b. Consumers demand, borrowing consumers These demands are aggregated without regard
to whether they are post or pre-income, they both occur within a relatively brief time
period and they recur continually in the ERE.
Although the consumption and the productive demands are aggregated to set the market rate
of interest, a point of great importance for the productive system is revealed if we separate
these demands analytically.
It is clear that the gross savings that maintain the production structure are the productive
savings, that is, those that go into productive investment, and that these exclude the consumption
savings that go into consumer lending.
From the point of view of the production system, we may regard borrowing by a consumer as dis-saving,
For this is the amount by which a person's consumption expenditures exceed his income,
as contrasted to savings, the amount by which a person's income exceeds his consumption.
In that case, the savings loaned are cancelled out, so to speak, by the dis-savings of the
consumption borrowers.
The consumers' and producers' subdivisions of the time market are a good illustration
of how the rate of interest is equalized over the market.
The connection between the returns on investment and money loans to consumers is not an obvious
one, but it is clear from our discussion that both are parts of one time market.
It should also be clear that there can be no long-run deviation of the rate of interest
on the consumption loan market from the rate of interest return on productive investment.
Both are aspects of one time market.
If the rate of interest on consumers' loans, for example, were higher than the rate of
interest returned from investment, savings would shift from buying future goods in the
form of factors to the more remunerative purchase of IOUs.
This shift would cause the price of future factors to fall, that is, the interest rate
and Investments to rise, and the rate of interest on consumers' loans to fall as a result of
the competition of more savings in the consumer loan arena.
The everyday arbitrage of the market, then, will tend to equalize the rate of interest
in both parts of the market.
Thus, the rate of interest will tend to be equalized for all areas of the economy, as
as it were, in three dimensions, horizontally in every process of production, vertically
at every stage of production, and in depth in the consumer loan market as well as in
the production structure.