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

516 Money, Bank Credit, and Economic Cyclesassumption that all actions occur at once, a false and totallygroundless supposition which not only avoids solving important,real economic issues, but also constitutes an almostinsurmountable obstacle to the discovery and analysis of themby economics scholars. This idea has also led Clark and hisfollowers to believe interest is determined by the “marginalproductivity” of that mysterious, homogenous fund they considercapital to be, which explains their conclusion that as thisfund of capital increases, the interest rate will tend to fall. 88 For our purposes, i.e., the analysis of the effects credit expansion exertson the productive structure, it is not necessary to take a stand here onwhich theory of interest is the most valid, however it is worth notingthat Böhm-Bawerk refuted the theories which base interest on the productivityof capital. In fact according to Böhm-Bawerk the theorists whoclaim interest is determined by the marginal productivity of capital areunable to explain, among other points, why competition among the differententrepreneurs does not tend to cause the value of capital goods tobe identical to that of their corresponding output, thus eliminating anyvalue differential between costs and output throughout the productionperiod. As Böhm-Bawerk indicates, the theories based on productivityare merely a remnant of the objectivist concept of value, according towhich value is determined by the historical cost incurred in the productionprocess of the different goods and services. However prices determinecosts, not vice versa. In other words, economic agents incur costsbecause they believe the value they will be able to obtain from the consumergoods they produce will exceed these costs. The same principleapplies to each capital good’s marginal productivity, which is ultimatelydetermined by the future value of the consumer goods and serviceswhich it helps to produce and which, by a discount process, yields thepresent market value of the capital good in question. Thus the origin andexistence of interest must be independent of capital goods, and mustrest on human beings’ subjective time preference. It is easy to comprehendwhy theorists of the Clark-Knight School have fallen into the trapof considering the interest rate to be determined by the marginal productivityof capital. We need only observe that interest and the marginalproductivity of capital become equal in the presence of the following: (1)an environment of perfect equilibrium in which no changes occur; (2) aconcept of capital as a mythical fund which replicates itself and involvesno need for specific decision-making with respect to its depreciation;and (3) a notion of production as an “instantaneous” process which takesno time. In the presence of these three conditions, which are as absurd asthey are removed from reality, the rent of a capital good is always equalto the interest rate. In light of this fact it is perfectly understandable that