Economics Questions

Re: A question on time preference

Jon Irenicus — Fri, 21 Aug 2009 11:40:29 GMT

If you're transcribing him correctly, all he is saying is that interest rates do not cause savings to form - individual TP is what motivates this, on analogy with how demand for any other good works. No matter how high the interest rate, if a person's TP is too high they will not save at any rate.

What is unclear?

Re: A question on time preference

Prashanth Perumal — Fri, 21 Aug 2009 07:13:09 GMT

Anybody?!

Re: A question on time preference

Prashanth Perumal — Thu, 20 Aug 2009 16:32:34 GMT

fsk:
Interest is the reward for someone producting more than they consume, so they can have savings for later.

Sorry dude, but I find it completely contradictory to Mises' writing. Let me quote what Mises says (Human Action., pg 560 of 950):

"People do not save and accumulate capital because there is interest.
Interest is neither the impetus to saving nor the reward or the compensation
granted for abstaining from immediate consumption. It
is the ratio in the mutual valuation of present goods as against future
goods.
The loan market does not determine the rate of interest. It adjusts
the rate of interest on loans to the rate of originary interest as manifested
in the discount of future goods."

The underlined line makes things even more interesting. Interestingly, if you are going to compare what Rothbard says with Mises' above lines, they seem to be complete opposites. Here is Rothbard on interest (ME&S., pg 452 of 1504):

"Every individual on the market has a similar type of time market
schedule, reflecting his particular value scale. The
schedule of each will be such that at higher rates of interest
there will be a greater tendency toward net saving, and at lower
rates of interest, less saving, until the individual becomes a net
demander........

The time-market schedules of all individuals are aggregated
on the market to form market-supply and market-demand
schedules for present goods in terms of future goods. The supply
schedule will increase with an increase in the rate of interest,
and the demand schedule will fall with the higher rates of
interest."

Re: A question on time preference

Jon Irenicus — Thu, 20 Aug 2009 16:30:42 GMT

If you're transcribing him correctly, all he is saying is that interest rates do not cause savings to form - individual TP is what motivates this, on analogy with how demand for any other good works. No matter how high the interest rate, if a person's TP is too high they will not save at any rate.

Re: A question on time preference

fsk — Thu, 20 Aug 2009 16:22:18 GMT

Suppose you're 30 years old. You do work now, but want to save some of the profits for your retirement.

You produced more than you consumed. Now, you have money.

The rest of society benefits, because you performed work in exchange for money.

If you lend that money to other people, they can invest your surplus labor profitably.

Interest is the reward for someone producting more than they consume, so they can have savings for later.

Suppose interest rates were determined by the free market and not a central bank credit monopoly. Other people are bidding on the right to invest my surplus labor. Whoever offers the highest interest rate, and is creditworthy, gets the right to invest my surplus labor when I lend them my money. This guarantees that surplus labor is invested efficiently.

When central banks distort the interest rate market, they distort people's ability to make economic decisions and plan for the future.

If I put Federal Reserve Notes in my checking account, I get 1% interest but true inflation is 10%-30%. By saving money, I'm letting the banksters rip me off via inflation.

A CEO of a large corporation wants to borrow to build a new factory. He may borrow at 6% while true inflation is 10%-30%. This sends a false price signal that building the factory was desirable. A factory is built, instead of something else that would be more useful.

The central bank credit monopoly steals, via inflation, my reward for producing more than I consume. There's reduced incentive to save, because my savings are stolen via inflation. There's incentive for people to rack up as much debt as they can, because interest rates are less than true inflation.

Re: A question on time preference

Prashanth Perumal — Thu, 20 Aug 2009 16:17:39 GMT

Jon Irenicus:
Strictly speaking, it'd be the spread between the interest rate John is willing to supply at and the prevailing market rate that would influence whether John lent or not, not the interest rate by itself.

Wouldn't that contradict Mises' reasoning that interest has no effect on a person's savings? If I am right, the Business cycle assumes that savers have a consumption-saving pattern that is independent of interest rates.

Let me quote what Rothbard says in ME&S:

Rothbard clearly suggests that interest rate has a direct effect on savings.

Re: A question on time preference

Jon Irenicus — Thu, 20 Aug 2009 16:11:13 GMT

Strictly speaking, it'd be the spread between the interest rate John is willing to supply at and the prevailing market rate that would influence whether John lent or not, not the interest rate by itself. His time preference determines the minimum interest rate he is willing to lend at. So it isn't that interest rates are irrelevant so much as it is that they're not what impels him to save. At least this is how I understand it. Similarly, it is not the price of something that determines whether someone is willing to sell it but their valuation of it; if they discern profit potential that is what will impel them to put it on offer.

A question on time preference

Prashanth Perumal — Thu, 20 Aug 2009 16:07:44 GMT

Mises in 'Human Action' says that interest is neither the reward nor the motive factor behind people saving. If that's the case, what exactly is the reason behind the appearance of interest rates?

If John isn't going to be concerned about interest rates while saving, how would interest rates appear? Wouldn't he be ready to lend his money to the bank for zero interest?

And if he is actually going to be concerned about his future goods vs. present goods ratio, how could it be said that interest rates don't mind to him?