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NOTE Appendix: Schumpeter and the Zero Rate of Interest

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Appendix, Schumpeter and the Zero Rate of Interest

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The late Professor Joseph Schumpeter pioneered a theory of interest which holds that the rate of interest will be zero in the evenly rotating economy.

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It should be clear why the rate of interest, the pure rate of interest in the ERE, could never be zero.

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It is determined by individual time preferences, which are all positive.

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To maintain his position, Schumpeter was forced to assert, as does Frank Knight,

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that capital maintains itself permanently in the ERE. If there is no problem of maintenance,

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then there appears to be no necessity for the payment of interest in order to maintain the

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Capital Structure.

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This view is apparently derived from the static state of J. B. Clarke and seems to follow

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purely by definition, since the value of capital is maintained by definition in the ERE.

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But this of course is no answer whatever.

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The important question is, how is this constancy maintained?

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And the only answer can be that it is maintained by the decisions of capitalists induced by

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a rate of interest return.

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If the rate of interest paid were zero, complete capital consumption would ensue.

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The conclusive Mises-Robbins critique of Schumpeter's theory of the zero rate of interest, which

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we have tried to present, has been attacked by two of Schumpeter's disciples.

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First, they deny that constancy of capital is assumed by definition in Schumpeter's ERE.

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Instead, it is deduced from the conditions of the system.

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What are these conditions?

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There is, first, the absence of uncertainty concerning the future.

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This indeed would seem to be the condition for any ERE.

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But Clements and Doody add, neither is there time preference, unless we introduce it as

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a special assumption, in which case it may be either positive or negative as we prefer,

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and there is nothing further to discuss.

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With such a view of time preference, there is, indeed, nothing to discuss.

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The whole basis for pure interest, requiring interest payments, is time preference, and

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If we casually assume that time preference is either non-existent or has no discernible

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influence, then it follows very easily that the pure rate of interest is zero.

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The author's proof simply consists of ignoring the powerful universal fact of time preference.

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As has been the case with all theorists who have attempted to deny time preference, Clements

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Preference and Duty hastily brush consumers' loans aside.

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As Frank A. Fetter pointed out years ago, only time preference can integrate interest

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on consumers as well as on producers' loans into a single unified explanation.

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Consumers' loans are clearly unrelated to productivity explanations of interest and

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and are obviously due to time preference.