“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself. There prevails a tendency toward the equalization of this ratio for all commodities. In the imaginary construction of the evenly rotating economy the rate of originary interest is the same for all commodities” (Mises 2008: 523).First, this is quite clearly a real theory of the interest rate, in which present real goods exchange for future real goods, or in other words where loans are imagined as occurring in natura. The “originary interest” is a ratio. Mises describes it as the “discount of future goods as against present goods” (Mises 2008: 521).
In terms of capital goods, the “originary interest rate” arising in Mises’s equilibrium world called the “evenly rotating economy” (ERE) would be the same as the Wicksellian natural rate of interest.
Mises asserts that there is “a tendency toward the equalization of this ratio for all commodities,” but this is unconvincing. Nor can there ever be a single “originary interest rate” outside of purely imaginary equilibrium states.
Mises has his own monetary or market rate of interest on loans called the “gross money rate of interest” (Mises 2008: 534). Mises conceives the “gross money rate of interest” as being determined by other factors in addition to originary interest, as follows:
(1) the entrepreneurial component: interest determined by the speculative element in money lending and the dangers involved (Mises 2008: 536–538).In Austrian theory, unfettered market interest rates – or ideal laissez faire gross money rates of interest – are supposed to gravitate towards an “originary interest rate” or Wicksellian natural rate of interest, and thereby allocate resources effectively in an intertemporal sense. By this process, a monetary interest rate is supposed to move towards a natural rate of interest so that his coordinates resources and provides intertemporal coordination of investment projects with real resources.
(2) the price premium: an additional element in interest to take account of expected changes in inflation or the general price level (Mises 2008: 538–542).
But the natural rate of interest can only be a single rate inside general equilibrium (or in some other equilibrium state such as Mises’s “final state of rest” or the ERE). Outside of general equilibrium, there can be as many natural rates as there are capital goods commodities lent out. No monetary system where capital goods investments are made by means of money can hit the right multiple natural interest rates either on each in natura loan of various capital goods, because even though the banks’ monetary interest rates – even in a free banking system – might converge in a spread, there could be vast differences between the spread of banks rates and many individual commodity natural rates.
The Austrian theory of interest rates – either the monetary rate or the (alleged) real rate – is grossly unrealistic and flawed.
First, in any advanced capitalist economy, people are generally lending and borrowing money, not real goods. How can a convergence to a “real” originary rate on goods emerge when borrowing is not in barter loans, but in terms of money?
Secondly, the nature of monetary interest rates in a market economy, and even hypothetical free market ones, is not described by time preference theory.
In any capitalist economy, there will generally be a stock of money used to buy and sell assets on secondary markets (whether real or financial markets). This money can be diverted to use in lending or clearing of loans for capital goods investments. Even if one were to use loanable funds model, a decrease in liquidity preference can increase funds available for lending without a corresponding decrease in consumption, since it might be merely money previously used on secondary asset markets or dishoarded. Such shifts are merely just changes in the liquidity of assets held in a person’s portfolio, not changes in time preference. Therefore changes in monetary interest rates even in some hypothetical free market system need not necessarily communicate any significant information about time preference or even any meaningful information at all.
Even when people abstain from consumption and save money, it does not follow that their saving now will entail a consumption expenditure in the future. Resources may not have been consumed now, but it does not follow that the eventual output of those resources in a capital goods project will be demanded in the future.
To sum up, one can say that:
(1) a decision to save money now does not entail a future consumption purchase;BIBLIOGRAPHY
(2) saved money now need not be invested in capital goods projects, and may be used to buy secondary assets (either real or financial). A large stock of money is at any one time tied up in purchases and sales of secondary assets;
(3) money made available for capital goods investments may have simply been shifted from purchasing of secondary assets (either real or financial) and not from abstention from consumption, and there need be no change in time preference, only liquidity preference.
(4) changes in monetary interest rates, even in hypothetical free market economies, need signal no reliable information and indeed no information at all about time preference or real resource availability.
Maclachlan, Fiona C. 1993. Keynes’ General Theory of Interest: A Reconsideration. Routledge, London.
Mises, L. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.