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

290 Money, Bank Credit, and Economic Cycleswho own the company. This implicit component, togetherwith the risk factor and entrepreneurial profits or losses whichresult from the purely entrepreneurial activity of the business,give rise to accounting profits. From this perspective it is possiblefor a company to report accounting profits (i.e., netincome) when it has actually suffered entrepreneurial losses, ifaccounting profits fail to reach the amount necessary toexceed the implicit gross-market-interest-rate component thatapplies to resources capitalists invest in their businessesthroughout the financial year.In any case, regardless of the external form interest takes,the key is to remember that as a market price or social rate oftime preference, interest plays a vital role in the coordinationof the behavior of consumers, savers, investors, and producersin a modern society. Just as it was crucial for Robinson Crusoeto coordinate his actions and refrain from dedicating to futuregoals an effort disproportionate to his stock of saved presentgoods, the same issue, intertemporal coordination, arises constantlyin society.In a modern economy, present and future behaviors arereconciled through entrepreneurial activity in the marketwhere present goods are exchanged for future goods and theinterest rate, the market price of one type of goods in terms ofthe other, is established. Thus the more plentiful the savings,i.e., the greater the quantity of present goods sold or offered forsale, other things being equal, the lower their price in terms offuture goods; and consequently, the lower the market rate ofinterest. This indicates to entrepreneurs that more presentgoods are available, which enables them to increase the lengthand complexity of the stages in their production processes,making these stages more productive. In contrast, the fewerthe savings, i.e., other things being equal, the less economicagents are willing to give up immediate consumption of presentgoods, the higher the market rate of interest. Thus a highmarket rate of interest shows that savings are relatively scarce,an unmistakable sign entrepreneurs should heed to avoidunduly lengthening the different stages in the productionprocess and generating as a result discoordination or maladjustmentswhich pose a great danger to the sustained, healthy