I'm in the interest rate chapter of Man, Economy, and State, and I am confused to how the interest rate gets determined. If the market was only the two people that he speaks of in section 3 (of CH 6), what would they land on for their equilibrium interest rate?
The diagrams are linked here (page 445, 446, and 448 in adobe, 380, 381, and 383 in Man, Economy, and State) http://mises.org/books/mespm.pdf
Earlier on in the section on direct exchange he showed how suppliers and demanders interacted to determine an equilibrium price using diagrams of their supply/demand schedule, is that possible to do with these two people?
The key is in how much future goods are discounted.
Let's take a normal example of price. A is willing to purchase an apple from B for up to one dollar, while B is willing to sell it for as low as 90 cents. The price will fall somewhere between 90 cents and a dollar (and will be influenced by, among other things, who the better haggler is).
Now, let's say A has one dollar and wants to buy an apple right now. An apple tomorrow is worth, to him, only half of what an apple today is worth. Therefore, he would need to be able to purchase at least two apples tomorrow to equal the one apple he can purchase now (let's assume he expects the price of apples to remain the same). If B wants to borrow that dollar, he will need, IF he promises to pay it back the following day and IF A has complete confidence that he will do so, to promise to pay back at least two dollars to get A to agree to extend the loan. Let's say that B wants this loan to eat an apple now, and that an apple now is worth to him three times what an apple tomorrow will be worth, when he pays back the loan. B will then be willing to pay up to three dollars tomorrow to borrow the one dollar today (again, if he expects prices to remain the same).
The actual interest rate depends on how often it is compounded, but for simplicity's sake we'll say it is compounded daily. Therefore, any interest rate that falls between 100% and 200% will get them both to agree to the loan, with the precise rate being determined by the same factors as in the first example.
Every decent man is ashamed of the government he lives under - Mencken
So, using the two scales Rothbard gives, would the equilibrium rate in that hypothetical two person market be 2%?
bump