Can anybody help me with these? on page 535 of the Scholar’s Edition mises says that there is a neutral rate of interest, which is the single, uniform rate that would obtain in the ERE. He defines the gross money rate of interest as the market rate of interest on loans, which changes in market data will obviously influence. His next sentence says this:
“Can such changes in the gross money rate cause the net rate of interest included in it to deviate lastingly from the height which corresponds to the rate of orginary interest, i.e., the difference between the valuation of present and future goods?”
Is the net rate of interest the same as the neutral rate/originary rates of interest, or is this a distinct category? It seems that he’s implying that they’re synonyms, but I’m not sure…Murphy’s study guide doesn’t seem to shed any light on that either, by the way.
Thanks
My superficial read, which will require examination to see if it is right:
If you read the next section, you see that gross rate of interest on money includes entrepeneurial profit. There are a few other things he mentions in earlier and later sections that need a careful reading to see if they are included in gross rate of interest, such as price premium and mangerial wages. The net rate is the gross rate after you subtract the component of entrepeneurial profit included in it [and possibly other stuff, needs careful reading to find out, like I said].
I suspect that trimmed of all the other stuff, what he calls the net rate, all you have is the neutral rate or the originary rate.
He gives the same rate three names because of three ways of looking at it.
Originary rate means the rate of interest which tends to be the same for all things in the world in an ERE, how much more a bird in the hand is worth over two in the bush, which equals how much more one will gladly pay Tuesday for a hamburger today.
Neutral rate means the rate of interest for borrowing money assuming money is neutral, meaning that supply and demand changes in money do not influence anything.
Net rate is the rate you get from subtracting the “fat” [entrepeneurial profit, possibly price premium etc] from the gross rate.
All those three are identical, just as, to use an analogy, 2+4 and 3+3 and 2*3 are all 6, looked at from different angles.
EDIT: congrats on making it to page 535, that is running a serious marathon.
Nice answer, helped me a lot.
Heh. Thanks, I can’t say it’s been an easy read, but then again it hasn’t been unenjoyable either. I’ve already read Man, Economy and State, and I’m sure it’s because I’ve read that and a number of other “Austrian” works, but I’m finding this to be a lot easier to grasp than I was anticipating. There are a lot of nuances that have definitely beefed up my grasp of AE. All in all, a fun way to spend a summer.
Edit - Plus, you can’t beat the feeling of superiority that comes with reading a treatise on economics in your spare time 