UP TO THIS POINT, WE have been investigating the rate of interest as it would be determined in the evenly rotating economy, i.e., as it always tends to be determined in the real world. Now we shall investigate the pricing of the various factors of production in the same terms, i.e., as they tend to be in the real world, and as they would be in the evenly rotating economy.

When we state that the time-preference schedules of all individuals in the society determine the interest rate and the proportion of savings to consumption, we mean all individuals, and not some sort of separate class called “capitalists.” There is a temptation, since the production structure is analyzed in terms of different classes—landowners, laborers, and capitalists—to conclude that there are three definite stratified groups of people in society corresponding to these classifications.

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 producers’ demand for present goods on the time market. This is the demand 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; i.e., it takes place prior to the acquisition of money income from the productive system.

We have completed our analysis of the determination of the pure rate of interest as it would be in the evenly rotating economy—a rate that the market tends to approach in the real world. We have shown how it is determined by time preferences on the time market and have seen the various components of that time market. This statement will undoubtedly be extremely puzzling to many readers. Where is the producers’ loan market? This market is always the one that is stressed by writers, often to the exclusion of anything else.

It is clear that, far from being the centrally important element, the producers’ loan market is of minor importance, and it is easy to postulate a going productive system with no such market at all. But, some may reply, this may be all very well for a primitive economy where every firm is owned by just one capitalist-investor, who invests his own savings. What happens in our modern complex economy, where savings and investment are separated, are processes engaged in by different groups of people—the former by scattered individuals, the latter by relatively few directors of firms?

We are now ready to embark on an analysis of the effect of joint-stock companies on the producers’ loan market.

Let us take the aforementioned firm with a total capital stock and capital value of 130 ounces and owned by six stockholders. The firm earns a net income of 5 percent per year for its owners, and this is the interest rate earned by all the firms in the economy.

Praxeology can never furnish an ultimate explanation for a man’s time preferences. These are psychologically determined by each person and must therefore be taken, in the final analysis, as data by economists. However, praxeological analysis can supply some truths about time preferences, using ceteris paribus assumptions. Thus, as we have seen above, each person has a time-preference schedule relating to his money stock.

It is clear that the natural interest rates are highly flexible; they tend toward uniformity and are easily changed as entrepreneurial expectations change. In the real world the prices of the various factors and intermediate products, as well as of the final products, are subject to continual fluctuation, as are the prices of stock and the interest return on them. It is also clear that the interest rate on short-term loans is easily changed with changed conditions. As the natural interest rate changes, the new loans for short periods can easily conform to the change.

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. It should be clear from the above discussion why the rate of interest (the pure rate of interest in the ERE) could never be zero. It is determined by individual time preferences, which are all positive. To maintain his position, Schumpeter was forced to assert, as does Frank Knight, that capital maintains itself permanently in the ERE.

The time market, like other markets, consists of component individuals whose schedules are aggregated to form the market supply and demand schedules. The intricacy of the time market (and of the money market as well) consists in the fact that it is also divided and subdivided into various distinguishable sub-markets. These are aggregable into a total market, but the subsidiary components are interesting and highly significant in their own right and deserve further analysis. They themselves, of course, are composed of individual supply and demand schedules.