6. A Summary of the Market
The explanation of the free economic system constitutes a great architectural edifice.
Starting from human action and its implications, proceeding to individual value scales and
a money economy, we have demonstrated that the quantity of goods produced, the prices
The prices of consumers' goods, the prices of productive factors, the interest rate, profits and losses, all can be explained by the same deductive apparatus.
Given a stock of land and labor factors, given existing capital goods inherited from the past, given individual time preferences and, more broadly, technological knowledge,
Capital Good Structure and Total Production is determined.
Individual preferences set prices for the various consumers' goods,
and the alternative combinations of various factors in their production
set the marginal value productivity schedules of these factors.
Ultimately, the marginal value product accruing to capital goods
is resolved into returns to land, labour and interest for time.
The point at which a land or labour factor will settle on its DMVP schedule will be determined by the stock available.
Since each factor will operate in an area of diminishing physical and certainly diminishing value returns,
In these terms, any increased stock of the factor, other things being equal, will enter at a lower DMVP point.
The intersecting points on the DMVP schedules will yield the prices of the factors, also known as rents and wage rates, in the case of labor factors.
Pure interest rate will be determined by the time preference schedules of all individuals
in the economy.
Its chief expression will be not in the loan market, but in the discounts between prices
in the various stages of production.
Interest on the loan market will be a reflection of this natural interest rate.
All the prices of each good, as well as the interest rate, will be uniform throughout
The Capital Value of Every Durable Good will equal the discounted value of the sum of future rents to be obtained from the good, the discount being the rate of interest.
All this is a picture of the evenly rotating economy, the equilibrium situation toward which the real economy is always tending.
If consumer valuations and the supply of resources remained constant, the relevant ERE would be reached.
The forces driving toward the ERE are the profit-seeking entrepreneurs who take the lead in meeting the uncertainties of the real world.
By seeking out discrepancies between existing conditions and the equilibrium situation and remedying them, entrepreneurs make profits.
Profits, those businessmen who unwittingly add to the maladjustments on the market are
penalized with losses.
Thus, to the extent that producers wish to make money, they drive toward ever more efficient
servicing of the desires of the consumers, allocating resources to the most value-productive
areas and away from the least value-productive.
The monetary value productivity of a course of action depends on the extent to which it
serves consumer needs.
But consumer valuations and supplies of resources are always changing so that the ERE goal always
changes as well and is never reached.
We have analyzed the implications of changing elements in the economy.
An increase in the labor supply may lower the DMVP of labor and hence wage rates, or
raise them, because of the further advantages of the division of labor and a more extended
market.
Which will occur depends on the optimum population level.
Since labor is relatively more scarce than land, and relatively non-specific, there will
always be idle and zero-rent land.
While there will never be involuntarily idle or zero-wage labor, an increase or decrease
in the supply of sub-marginal land will have no effect on production, an increase in super-marginal
land will increase production and render hitherto marginal land sub-marginal.
Lower time preferences will increase capital investment and thereby lengthen the structure
of Production.
Such lengthening of the production structure, increasing the supply of capital goods, is
the only way for man to advance from his bare hands and empty acres of land to more and
more civilized standards of living.
These capital goods are the necessary waystations on the road to higher total production, but
they must be maintained and replaced as well as initially produced if people wish to keep
to keep their higher standard over any length of time.
To expand production, the important consideration is not so much technological improvement as greater capital investment.
At no time has invested capital exhausted the best technological opportunities available.
Many firms still use old, unimproved processes and techniques simply because they do not
have the capital to invest in new ones.
They would know how to improve their plant if capital were available.
Thus, while the state of technology is ultimately a very important consideration, at no given
time does it play a direct role, since the narrower limit on production is always the
In a progressing economy, given a constant supply of money, increased investment and a longer capital structure bring about lower money prices for factors, and still lower prices for consumers' goods.
Real factor prices, corrected for changes in the purchasing power of the monetary unit, increase.
In net terms, this means that real land rents and real wage rates will increase in the progressing economy.
Interest rates will fall as time preference rates drop and the proportion of gross investment to consumption increases.
If rents are earned by a durable factor, they can be and are capitalized on the market.
That is, they have a capital value equivalent to the discounted sum of their expected future rents.
Since land is a form of investment on the market, just as our shares of a firm,
its future rents will be capitalized,
so that land will tend to earn the same uniform interest rate as any other investment.
In a progressing economy, the real capital value of land will increase,
of Money, The Theory of Money and Credit, The Theory of Money and Credit, The Theory
The course of change in a retrogressing economy will be the opposite.
In a stationary economy, total production, the capital structure, real wages per capita, real capital values of land, and the rate of interest will remain the same,
While the allocation of factors of production and the relative prices of various products will vary.