3. Time Preference and Individual Value Scales
Before considering the component parts of the time market further, let us go to the very root of the matter: the value scale of the individual. As we have seen in the problem of pricing and demand, the individual’s value scale provides the key to the determination of all events on the market. This is no less true in regard to the interest rate. Here the key is the schedule of time-preference valuations of the individual.
A couple of careful readers wrote to inform me that the Louisiana law banning secondhand dealers from engaging in cash transactions, which I implied in my post yesterday was passed recently, was actually passed in July, 2011. The article that served as the basis for my post did not give the date the law was enacted.
Market relationships are constantly criticized as selfish or greedy, with rewards to selfishness rendering them ethically damaging. As Friedrich Hayek put it, “the belief that individualism approves and encourages human selfishness is one of the main reasons why so many people dislike it.” However, that charge is false.
Markets do involve self-interested people jointly advancing their goals, often without even knowing one another, but pursuing one’s self-interest is not the same as being selfish.
The quality of economic journalism in the United States is terrible. Day after day, journalists write about the causes and consequences of economic conditions and events without understanding the underlying economics of the situation, and their articles are, as a rule, simply bunk. Here is an example.
6. Production: The Rate of Interest and Its Determination
1. Many Stages: The Pure Rate of Interest
UP TO THIS POINT WE HAVE1 been treating the structure of production as amalgamated into one stage. One or several firms have all been vertically integrating all the stages of production of a product (with all factors specific), until finally the product is sold to the consumer. This is certainly an unrealistic assumption.
2. The Determination of the Pure Rate of Interest: The Time Market
It is clear that the rate of interest plays a crucial role in the system of production in the complex, monetary economy.7 How is the rate of interest determined?
5. Cost
At this point, let us reintroduce the concept of “cost” into the analysis. We have seen above that the cost, or “marginal” cost, of any decision is the next highest utility that must be forgone because of the decision. When a means M must be distributed among ends E1, E2, and E3, with E1 ranked highest on the individual’s value scale, the individual attempts to allocate the means so as to attain his most highly valued ends and to forgo those ranked lower, although he will attain as many of his ends as he can with the means available.
6. Ownership of the Product by Capitalists: Amalgamated Stages
Up to this point we have discussed the case in which the owners of land and labor, i.e., of the original factors, restrict their possible consumption and invest their factors in a production process, which, after a certain time, produces a consumers’ good to be sold to consumers for money. Now let us consider a situation in which the owners of the factors do not own the final product. How could this come about? Let us first forget about the various stages of the production process and assume for the moment that all the stages can be lumped together as one.
7. Present and Future Goods: The Pure Rate of Interest
We are deferring until later the major part of the analysis of the pricing of productive services and factors. At this point we can see, however, that the purchasing of labor and land services are directly analogous. The classical discussion of productive income treats labor as earning wages whereas land earns rents, and the two are supposed to be subject to completely different laws. Actually, however, the earnings of labor and land services are analogous.
