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

288 Money, Bank Credit, and Economic Cyclesof a society in which no loan market exists, and all economicagents invest their savings in production directly (via internalfinancing and retained earnings through partnerships, corporations,and cooperatives). Although in this case no interestrate would be established in a (nonexistent) loan market, aninterest rate would still be determined by the ratio at whichpresent goods are exchanged for future goods in the differentintermediate stages in production processes. Under these circumstancesthe interest rate would be determined by the “rateof profit” which would tend to equal the net income at eachstage in the production process, per unit of value and timeperiod. Although this interest rate is not directly observable inthe market, and even though in each company and in each specificproduction process it incorporates important external factors(such as the components of pure entrepreneurial profits orlosses, and the risk premium), the profit generated in eachstage of the entire economic system would tend to correspondto the interest rate, due to the typical entrepreneurial process ofequalizing accounting profits over the different stages of theproductive structure, assuming no further changes occur andall creative possibilities and opportunities for entrepreneurialprofit have already been discovered and exploited. 23market in which goods and services are exchanged for monetary unitsand in which the price or purchasing power of money, and the monetaryprice of each good and service are simultaneously determined. Thisis why the following affirmation, made by Marshall, is wholly misleading:“The ‘money market’ is the market for command over money: ‘thevalue of money’ in it at any time is the rate of discount, or of interest forshort period loans charged in it.” Alfred Marshall, Money Credit andCommerce (London: Macmillan, 1924), p. 14. Mises, in Human Action, p.403, completely clears up Marshall’s confusion of terms.23 However, strictly speaking, the concept of a “rate of profit” makes nosense in real life, and we have only introduced it by way of illustrationand to aid the reader in understanding the theory of the cycle. As Misesstates:[I]t becomes evident that it is absurd to speak of a “rate ofprofit” or a “normal rate of profit” or an “average rate ofprofit.” . . . There is nothing “normal” in profits and there cannever be an “equilibrium” with regard to them. (Mises,Human Action, p. 297)