Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

284 Money, Bank Credit, and Economic Cyclesa dynamic and very complex productive structure whichalways tends to expand horizontally and vertically. 20 Withoutfree entrepreneurship, nor free markets for capital goods andmoney, it is impossible to make the necessary economic calculationregarding the horizontal and vertical extension of thedifferent stages in the production process, resulting in widespreaddiscoordinated behavior that throws society off balanceand prevents its harmonious development. In entrepreneurialprocesses of intertemporal coordination, a leading roleis played by an important market price: the price of presentgoods in relation to future goods, more commonly known asthe interest rate, which regulates the relationship betweenconsumption, saving and investment in modern societies, andwhich we will study in detail in the next section.THE INTEREST RATEAs we have seen, other things being equal, humansalways place present goods higher than future goods on theirscale of value. However the relative intensity of this differencein subjective valuation varies substantially from one person toanother; and it can even vary greatly throughout the life ofone person based on changes in his circumstances. Some peoplehave a high time preference and value the present greatlyin relation to the future; thus they are only willing to sacrificethe immediate achievement of their ends if they expect orbelieve they will accomplish in the future goals they subjectivelyvalue very highly. Other people have a more limitedtime preference, and although they also value present goodsmore than future goods, they are more predisposed to relinquishthe immediate achievement of their aims in exchangefor objectives which they value only a little more and whichwill be reached tomorrow. This difference in the psychic intensityof the subjective valuation of present goods in relation tofuture goods, a difference reflected on each human actor’s20 This is the terminology used, for example, by Knut Wicksell in Lectureson Political Economy (London: Routledge and Kegan Paul, 1951), vol. 1,p. 164, where Wicksell expressly mentions a “horizontal-dimension”and a “vertical-dimension” to the structure of capital goods.