So according to Austrian capital theory, there would still be a positive profit rate even if markets were perfectly competitive, and all actors had perfect information, correct? Time preference would still exist and would still create surplus value.
Also, if circular flow accurately described the market economy (one level in the structure of production), would the natural rate of interest be at 0%? Does a 1% rate of natural interest presuppose some kind of lengthening of the capital structure? Schumpeter and Keynes use circular flow, with one stage of production, and come to the conclusion that profits exist only as arbitrage in the face of uncertainty and change.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Isn't "perfect competition," by definition, means that there are no profits? To say that there are profits negates the model.
von Vodka:Isn't "perfect competition," by definition, means that there are no profits? To say that there are profits negates the model.
Yes, according to the mainstream, there are no economic profits with perfectly competitive markets. Competitions pushes it down to 0%. But for Austrians, there should still be x% profit rate due to time preference (I'm 98% sure).
What is meant by circular flow, IE evenly rotating economy?
filc:What is meant by circular flow, IE evenly rotating economy?
Yeah.
Eusric,
Pages 527-529 of Human Action: SE has your answer.
"It has been asserted that in the imaginary construction of the evenly rotating economy no interest would appear.[3] However, it can be shown that this assertion is incompatible with the assumptions on which the construction of the evenly rotating economy is based.
We begin with the distinction between two classes of saving: plain saving and capitalist saving. Plain saving is merely the piling up of consumers' goods for later consumption. Capitalist saving is the accumulation of goods which are designed for an improvement of production processes. The aim of plain saving is later consumption; it is merely postponement of consumption. Sooner or later the goods accumulated will be consumed and nothing will be left. The aim of capitalist saving is first an improvement in the productivity of effort. It accumulates capital goods which are employed for further production and are not merely reserves for later consumption. The boom derived from capitalist saving is the increase of the quantity of goods produced or the production of goods which could not be produced at all without its aid. In constructing the image of an evenly rotating (static) economy, economists disregard the process of capital accumulation; the capital goods are given and remain, as, according to the underlying assumptions, no changes occur in the data. There is neither accumulation of new capital through saving, nor consumption of capital available through a surplus of consumption over income, i.e., current production minus the funds required for the maintenance of capital. It is now our task to demonstrate that these assumptions are incompatible with the idea that there is no interest.
There is no need to dwell, in this reasoning, upon plain saving. The objective of plain saving is to provide for a future in which the saver could possibly be less amply supplied than in the present. Yet, one of the fundamental assumptions characterizing the imaginary construction of the evenly rotating economy is that the future does not differ at all from the present, that the actors are fully aware of this fact [p. 531] and act accordingly. Hence, in the frame of this construction, no room is left for the phenomenon of plain saving.
It is different with the fruit of capitalist saving, the accumulated stock of capital goods. There is in the evenly rotating economy neither saving and accumulation of additional capital goods nor eating up of already existing capital goods. Both phenomena would amount to a change in the data and would thus disturb the even rotation of such an imaginary system. Now, the magnitude of saving and capital accumulation in the past--i.e., in the period preceding the establishment of the evenly rotating economy--was adjusted to the height of the rate of interest. If--with the establishment of the conditions of the evenly rotating economy--the owners of the capital goods were no longer to receive any interest, the conditions which were operative in the allocation of the available stocks of goods to the satisfaction of wants in the various periods of the future would be upset. The altered state of affairs requires a new allocation. Also in the evenly rotating economy the difference in the valuation of want-satisfaction in various periods of the future cannot disappear. Also in the frame of this imaginary construction, people will assign a higher value to an apple available today as against an apple available in ten or a hundred years. If the capitalist no longer receives interest, the balance between satisfaction in nearer and remoter periods of the future is disarranged. The fact that a capitalist has maintained his capital at just 100,000 dollars was conditioned by the fact that 100,000 present dollars were equal to 105,000 dollars available twelve months later. These 5,000 dollars were in his eyes sufficient to outweigh the advantages to be expected from an instantaneous consumption of a part of this sum. If interest payments are eliminated, capital consumption ensues.
This is the essential deficiency of the static system as Schumpeter depicts it. It is not sufficient to assume that the capital equipment of such a system has been accumulated in the past, that it is now available to the extent of this previous accumulation and is henceforth unalterably maintained at this level. We must also assign in the frame of this imaginary system a role to the operation of forces which bring about such a maintenance. If one eliminates the capitalist's role as receiver of interest, one replaces it by the capitalist's role as consumer of capital. There is no longer any reason why the owner of capital goods should abstain from employing them for consumption. Under the assumptions implied in the imaginary construction of static conditions (the evenly rotating economy) there is no need to keep them in reserve for rainy days. But even if, inconsistently enough, we [p. 532] were to assume that a part of them is devoted to this purpose and therefore withheld from current consumption, at least that part of capital will be consumed which corresponds to the amount that capitalist saving exceeds plain saving.[4]
If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.
Therefore there cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to "abolish" interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty."
If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.
I'm assuming he means zero TP by "no originary interest"?
Freedom of markets is positively correlated with the degree of evolution in any society...