First, you get an A+ just for using the precise term of “reservation demand for money” . If only people, including many Austrians, carefully distinguished reservation demand from exchange demand they would save themselves many errors and misunderstandings. Instead, people insist on just saying demand for money and then resorting to velocity of circulation to explain what they mean.
Second, If the reservation demand for money rises on account of forgoing consumption, while investment in future goods remains the same, then the rate of interest will indeed fall just as if spending was reallocated from consumption to investment. But it’s not the change in [reservation] demand for money that has caused this change in interest rate but a change in time preference occuring together with an increase in reservation demand for money. The fatal errror of all monetary theories of intrest is that they fail to seperate time preference from demand for money.
Third, the rate of interest is a market phenomenon, not an individual phenomenon. It is determined by the societal allocation between preference for present goods and future goods. It is not correct to just ask what happends to the interest rate when one person does this or that. What must be considered is the totallity of the new allocation between present and future. Has it changed? If demand for money rises without a change in societal time preference, then spendings is reduced from both consumption and investment in the same proportion as the current allocation between the two. It is then evident that no change in the interest rate occurs, but only the price level.
SmilingDave that is just wrong. If there is Mises-Rothbard then there is also Mises-Hayek. Trying to put Mises squarley in Rothbard’s camp is disengenous, especially when Hayek was a much better economist and political philosopher.
An economist’s stated position on a matter is an historical fact, independent of his abilities.
My sources for the historical facts are in that long thread.
The way to determine if I am right or wrong is not by proving or disproving Mises’ greatness, but by producing an actual quote of his on the subject, which I did many times over in that thread.
“Second, If the reservation demand for money rises on account of forgoing consumption, while investment in future goods remains the same, then the rate of interest will indeed fall just as if spending was reallocated from consumption to investment.”
I’m not saying you’re wrong, but what is the specific markt mechanism/process by which the interest rate falls in this case? I realize time preference is lowered and the investment-consumption ratio shifts in favor of the former, but I’m not quite sure how this translates into a lower interest rate.
The important thing to realize is that the total amount of consumer spending goes to capitalist’s interest income and original factor income in the ERE. If consumer spending falls, then what we know with certainty is that the total amount of money that goes to interest/original factor income also falls. Since the total amount saved remained constant, but the amount that needs to go to interest income/original factor income fell, this frees up savings to be used for additional circulating capital in the form of more stages in the structure of production. The structure lengthens and the price spread falls just like if there was a net increase in investment, but just not as much.
" If consumer spending falls, then what we know with certainty is that the total amount of money that goes to interest/original factor income also falls."
Yes I agree with that. The problem I’m having is seeing what causes the interest rate to fall. If consumer spending falls due to an increased reservation demand for money (“hoarding” coming purely from consumption) leaving gross investment unchanged, I’m not sure that it follows that interest income falls since the fall in total income could be purely from a fall in original factor income.
If the interest rate falls then clearly interest income falls as well (same gross investment times a lower interest rate), but I’m still having trouble seeing why the interest rate falls or rather what mechanism/process causes it to fall. Maybe I’m thinking about it wrong? My intuition tells me you’re right, but I can’t explain it which is why I’m asking.
If your asking about it in supply and demand format, the way to visualize it is that the demand for present goods shifts downward along a vertical supply curve. The demand for present goods shifts downward because there is a decrease in consumer spending (meaning the total fund for O.F income and interest income declines and hence their demand for present goods), and while capitalist’s demand for present goods in the form of additional circulating capital and production stages increases, it does not increase enough to offset the decline.
In a normal scenario where consumption decreases while investment increases, the higher increased amount of savings equals a higher quantity demanded of present goods. The decreased demand curve of original factors is offset by an increased demand curve by capitalists. All that changes in this scenario is the supply curve shifting right along a downward shifting demand curve lowering the interest rate at a higher quantity of savings.
In the above scenario where saving does not increase, capitalist’s demand curve for P.G does not increase (because of no net increase in saving), and while their quantity demanded increases, the total demand curve for P.G shifts downwards along a vertical supply curve, lowering the interest rate although the quantity saved is still the same.
In triangle format, the interest rate falls because consumption falls and the total imputed value of O.F income/interest declines. Although they have no net increase in savings, they’ll take these savings and invest them in roundabout production processes that increase productivity and lower costs. These will allow them to maintain profit spreads (or increase them) even though consumption declined. As the economy arbitrates and tends to the ERE, their costs will be bid up to reflect the lower premium on present goods over future goods, ie the lower interest rate.
Mises was influenced by Wicksell himself, so the fact that you put only Hayek in the Wicksellian camp is intellectually dishonest. Mises made Wicksell’s theory of a natural rate of interest a central component of his business cycle theory. Hayek added important theoretical contributions to the Austrian critique of socialism. Rothbard also made quite a few deviations from Mises, in regards to the Gold Standard, Free Banking, monopoly theory, history of economic thought, and political philosophy. Rothbard was also highly misinformed, and borderline dishonest in his economic history and history of thought. Not very Misesian at all. The thread you link provides no proof that Hayek was not highly influenced by Mises. You’re letting your misguided view of history arbitrarily separate Mises and Hayek.
There is no “specific market process” for this and another “specific market process” for that.
The exact same mechanism by which the sturcture becomes more roundabout when savings are directly realocated from consumption to investment. Relative prices between presnt and future goods change. Demand on future goods is increased in real terms, while demand on present goods falls. It’s the precise same mechanism only the objective exchange value of moeny also changes.