Study Guide to Man, Economy, and State with Power and Market
Study Guide to Man, Economy, and State with Power and Market Study Guide to Man, Economy, and State with Power and Market
Chapter 6: Production: The Rate of Interest and Its Determination 77 Notable Contributions • Rothbard’s figure 41 (p. 369) is perhaps the most economical depiction of the Austrian approach to capital and interest. Like the mainstream “circular flow diagram,” figure 41 shows how, in the ERE, total expenditures (100 ounces of gold) equal total income (17 ounces to capitalists and 83 ounces to land and labor owners). However, figure 41 goes far beyond the typical macro diagram by depicting the structure of production, i.e., the fact that goods take time to mature from original factors into final consumer goods. • Rothbard’s critique (p. 401) of the concept of gross national product is relevant even today.
78 Study Guide to Man, Economy, and State with Power and Market Technical Matters 1. At several places in this chapter, Rothbard states that a multi-year rate of interest (in the ERE) must equal the appropriate multiple of the annual rate. For example, “A production process or investment covering a period of two years will, in equilibrium, then earn 10 percent, the equivalent of 5 percent per year” (p. 372). This simplification is common in economics (especially when the number of years is low), but strictly speaking the appropriate two-year rate of interest would need to be 10.25 percent, because of compounding. 2. Note that in Rothbard’s discussion on pp. 380–84, he is assuming that the future ounces of gold will be delivered in ten years. That is why he says that a market rate of interest of 2 percent (not 20 percent!) implies that “12 future ounces would be the price of 10 present ounces” (p. 381). As noted in the point above, Rothbard is here ignoring compound interest, and simply assumes that 2 percent per year for ten years translates into a 20 percent increase overall. 3. Rothbard’s numerical choices illustrate an interesting possibility, that an individual might be neither a lender nor a borrower (p. 384). This may surprise the reader, who may have been thinking along the lines of, “If the interest rate is higher than an individual’s initial time preference rate, he will lend, while if it is lower, he will borrow.” This quick reasoning is not entirely valid, because of the difference in marginal utility of the (N+1)th unit versus the (N-1)th unit.
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Chapter 6: Production: The Rate of Interest <strong>and</strong> Its Determination 77<br />
Notable Contributions<br />
• Rothbard’s figure 41 (p. 369) is perhaps the most economical<br />
depiction of the Austrian approach <strong>to</strong> capital <strong>and</strong><br />
interest. Like the mainstream “circular flow diagram,”<br />
figure 41 shows how, in the ERE, <strong>to</strong>tal expenditures (100<br />
ounces of gold) equal <strong>to</strong>tal income (17 ounces <strong>to</strong> capitalists<br />
<strong>and</strong> 83 ounces <strong>to</strong> l<strong>and</strong> <strong>and</strong> labor owners). However,<br />
figure 41 goes far beyond the typical macro diagram by<br />
depicting the structure of production, i.e., the fact that<br />
goods take time <strong>to</strong> mature from original fac<strong>to</strong>rs in<strong>to</strong> final<br />
consumer goods.<br />
• Rothbard’s critique (p. 401) of the concept of gross<br />
national product is relevant even <strong>to</strong>day.
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