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NOTE 6.06. The Post-Income Demanders

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6. The Post-Income Demanders

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Up to this point, we have analyzed the time market demand for present goods by landowners

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and laborers, as well as the derived demand by capitalists. This aggregate demand we may

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call the producer's demand for present goods on the time market. This is the demand by

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by those who are selling their services or the services of their owned property in the

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advancing of production.

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This demand is all pre-income demand as we have defined it.

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That is, it takes place prior to the acquisition of money income from the productive system.

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It is all in the form of selling factor services, future goods, in exchange for present money.

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But there is another component of net demand for present goods on the time market.

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This is the post-income component.

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It is a demand that takes place even after productive income is acquired.

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Clearly, this demand cannot be a productive demand, since owners of future goods used

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in production exercise that demand prior to their sale.

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It is, on the contrary, a consumer's demand.

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This subdivision of the time market operates as follows.

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Jones sells 100 ounces of future money, say one year from now, to Smith in exchange for

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95 ounces of present money.

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This future money is not in the form of an expectation created by a factor of production.

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Instead, it is an IOU by Jones, promising to pay 100 ounces of money at a point one year in the future.

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He exchanges this claim on future money for present money, 95 ounces.

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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,

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4, except that the present case is more obvious.

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The rate of interest finally set on the market is determined by the aggregate net supply

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and net demand schedules throughout the entire time market, and these, as we have seen, are

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determined by the time preferences of all the individuals on the market.

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The net borrowers, then, are people who have relatively higher time preference rates than

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and others at the going rate of interest, in fact, so high that they will borrow certain

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amounts at this rate.

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It must be emphasized here that we are dealing only with consumption borrowing, borrowing

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to add to the present use of Jones money stock for consumption.

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Jones' sale of future money differs from the sales of the landowners and laborers in

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another respect.

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Their transactions are completed, while Jones has not yet completed his.

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His IOU establishes a claim to future money on the part of the buyer, or lender, Smith.

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And Smith, to complete his transaction and earn his interest payment, must present his

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note at the later date and claim the money due.

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In sum, the time markets components are as follows 1. Supply of present goods for future

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goods, the savings of all 2. Demand for present goods by suppliers

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of future goods a. Producers demand, landowners, laborers

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b. Consumers demand, borrowing consumers These demands are aggregated without regard

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to whether they are post or pre-income, they both occur within a relatively brief time

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period and they recur continually in the ERE.

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Although the consumption and the productive demands are aggregated to set the market rate

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of interest, a point of great importance for the productive system is revealed if we separate

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these demands analytically.

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It is clear that the gross savings that maintain the production structure are the productive

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savings, that is, those that go into productive investment, and that these exclude the consumption

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savings that go into consumer lending.

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From the point of view of the production system, we may regard borrowing by a consumer as dis-saving,

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For this is the amount by which a person's consumption expenditures exceed his income,

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as contrasted to savings, the amount by which a person's income exceeds his consumption.

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In that case, the savings loaned are cancelled out, so to speak, by the dis-savings of the

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consumption borrowers.

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The consumers' and producers' subdivisions of the time market are a good illustration

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of how the rate of interest is equalized over the market.

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The connection between the returns on investment and money loans to consumers is not an obvious

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one, but it is clear from our discussion that both are parts of one time market.

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It should also be clear that there can be no long-run deviation of the rate of interest

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on the consumption loan market from the rate of interest return on productive investment.

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Both are aspects of one time market.

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If the rate of interest on consumers' loans, for example, were higher than the rate of

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interest returned from investment, savings would shift from buying future goods in the

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form of factors to the more remunerative purchase of IOUs.

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This shift would cause the price of future factors to fall, that is, the interest rate

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and Investments to rise, and the rate of interest on consumers' loans to fall as a result of

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the competition of more savings in the consumer loan arena.

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The everyday arbitrage of the market, then, will tend to equalize the rate of interest

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in both parts of the market.

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Thus, the rate of interest will tend to be equalized for all areas of the economy, as

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as it were, in three dimensions, horizontally in every process of production, vertically

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at every stage of production, and in depth in the consumer loan market as well as in

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the production structure.