While reading MES and reviewing Rothbard’s analysis of the time market (Chapter 6), I noticed that in Rothbard’s study of changes in time preference and the time market, he exclusively focuses on changes in the supply of savings and its relation (though not always apodictic) to consumption spending. Put it another way, when he discusses changes in consumption/savings and its effect on the interest rate, his resulting theorems and conclusons are based exclusively on shifts in the supply of P.G for F.G and do not take into consideration shifts in the demand schedule (F.G for P.G).
I searched on the web for any Austrian insights about this, and stumbled upon Hulsmann’s Paper “Time Preference and Investment Expenditure”.In it he elaborates on what I’m saying and ends up with the conclusion "that the aggregate proportion of consumption to savings is not systematically related to the interest rate" (Hulsmann 20). From what little I’ve read from Hulsmann, I’m not entirely a fan (I found some of his rebuttals to Bryan Caplan’s Austrian critiques unconvincing), but in this I have to agree with him. It seems that most of Austrian capital theory has neglected demand side changes in the general time market curve. As a result, alot of what Rothbard says (as well as most modern Austrian capital theorists) about the strict relationship between time preference, interest rates, and consumption/saving is not necessarily true.
The only other economist I found that wrote about the subject was Joseph Salerno in his 2001’s “Does the Concept of Secular Growth has a Base in Modern Macroeconomics?”. It in he critiques Garrison’s “Time and Money” analysis of “secular growth” because secular growth contradicts the notion of an economy tending to an ERE, and his analysis focuses on the Loanable Funds Market, which is not the ultimate time market. Starting on page 57 he analyses a change in the demand schedule for P.G, such as an increase in the labor force. He draws similiar conclusions on the analysis of the Structure of Production/quantity of savings, and the interest rate to Hulsmann, but he does not expound on the consquences of these as Hulsmann does. From what I can tell of Salerno’s papers and lectures, he seems a big Rothbard fan, so I am interested in finding his viewpoint on Hulsmann’s paper.
I think that these considerations of demand induced changes in the time market provide for an interesting discussion, especially on how the Austrians all tie together the interest rate and the proportion of savings to consumption. Anyone have any comments on Hulsmann’s paper and his opinon on its consequences? Critiques? Defenses of Rothbard? Opening up analysis of the time market to include changes on the demand side defintately broadens the Austrian analysis of the Production Structure and allows us to give further insights on things like “the Labor Force increases”.
I think it provides for some really interesting new theory (as well as revision) for Austrian Capital Theory. For one thing, this shows that there needs to be explicit emphasis on the distinction between capital wideing (duplicating existing production processes) and capital deepening (longer production processes that are more physically productive/extending on previous production processes). Lower time preferences invoke a lower interest rate (though not always greater savings!) while higher time preferences bring about higher interest rates (but consequently not always lower savings). As a result, lower time preferences always bring increase the profitability of longer production processes, but nothing apodictic can be said about the width of the capital structure. The same pattern can be said about higher interest rates.
Another point that I thought of (that as far as I am aware of, neither Salerno nor Hulsmann really discussed) was that if the labor supply was to increase, what happens to the production structure, ceteris paribus, is also bent on when or not the labor supply has increased beyond its optimal point. If the labor force was to increase up on its optimum point (such as the division of labor) then there would be an increase in MPP schedules. The capital structure would get extra wider and workers could get increased real wages (whether or not this “induces” greater savings" and lower the interest rate seems to violate ceteris paribus). If it was beyond the optimum point, then workers would get lower wages but still get more consumer goods from the increased capital width.
Secondly, as for on the individual level, the proportion between “consumer spending and investment spending” really isn’t all that enlightening about time preferences from basic observation. An individuals proportion between consumption and investment can change, but does just analyzing this reveal anything about their time market curve? From what I understand, no, because an individual can increase their savings not just through a lower time preference, but also through a higher interest rate. Certainly we can say something about the individual’s time preference curve (it lowered) if the increase in saving was the exogenous variable (he woke up one day and decided to save more) but nothing from simple observations of increases in saving (they could be shifts along his existing time market curve).
It seems that Rothbard does not include consumption in his analysis of the time market, because the “bottom” of the time market is present money. Going deeper than that to consumption itself is going beyond the time market, because, as he says, the sale of consumers’ goods…
“is not a time transaction, because it is an exchange of present goods (money) for present goods (consumers’ goods).”
I don’t think that means that, according to his analysis, a change in consumption wouldn’t result in a change in the rate of interest. It’s just that any change that he represents in the demand for future goods by the suppliers of present goods already factors in any effect of changes in consumption.
I’m slightly confused as to what this specificly relates to above (was this meant as a response to my question in the other thread?)
I’m not so sure this can be said, especially because Rothbard builds upon the notion of “Pre-Income” and “Post-Income” Time Market curves. If the labor force increased (causing a shift in the demand for P.G), then the rate of interest rises in society wiith an increase in the quantity of savings (Lets just say for the sake of analysis more laborers enter the workforce and the aggregate wage income is increased by $50) Pre income, the laborers demand P.G (which would include probably almost all “capitalist” people). Post Income, what people do with that money seems to be unrelated to their previous demand for P.G.
Firstly, the extra income may be spent all on consumption. How exactly this is exerted on the rate of interest is unclear in Rothbard’s framework, specifically his graph on page 418, where direct consumption spending is not directly related to the interest rate. Are we to assume that an increase in consumption spending would affect other capitalists’ time market curves and make present satisfactions more desirable to them? (This would shift the supply of P.G to the left). This is the only scenario I can think of, because other than that there seems to be no way directly for consumption spending to affect the rate of interest.
Secondly, the extra income can be spent on investment goods. If $50 was saved originally when the labor force increased, and all of the $50 were saved by laborers, then the supply of P.G would shift downwards and the rate of interest would fall while the quantiity of savings increased.
The third option is that all of this extra income is hoarded by the laborers, and there is no change in spending by them.
“I’m slightly confused as to what this specificly relates to above (was this meant as a response to my question in the other thread?)”
Well you’re saying above that his theory makes consumption irrelevant with regard to interest rates, right? So, I’m saying I don’t think that’s the case…
"Post Income, what people do with that money seems to be unrelated to their previous demand for P.G.
Firstly, the extra income may be spent all on consumption."
It seems you’re thinking of the post-income demand for present goods as being from suppliers of present goods (present money). If that were the case, then, again, Rothbard wouldn’t consider it as part of the time market, because it would involve exchanges of present goods for present goods. Post-income demand is still from suppliers of future goods. It’s just that the future goods are in the form of I.O.U.'s, as opposed to being in the form of hired productive services (as is the case with pre-income demand).
Thus, in the case of Figure 50 above, in diagram III we have a case of a net (post-income) demander at the market rate of interest. The form that his demand takes is the sale of an I.O.U. of future money…
Rothbard includes the Post Income Demand for Present Goods (money) as on the time market when it is for consumer loans, not the post income demand for Present Goods (buying consumer goods with your existing money stock). What you said below relates to a consumer’s time market schedule for consumer borrowing. What I’m talking about is plain consumer spending (present money for present goods), which actors do Post Income when they allocate income between consumption, investment, and hoarding (in the non ERE). Rothbard later says the the proportion of consumption to investment spending reflects individual time preferences, and a lowering of this proportion lowers time preferences and the rate of interest, while a higher ratio does the opposite. Setting aside my quibbles about whether or not this proportion actually signifies an individual’s time preference schedule shifting or a movement along their time market curve, his statement seems to overgeneralize things a little bit.
Take for example when Rothbard says on page 789 that when an individuals increases hoarding, if they stops spending exclusively on consumption spending, the interest rate with fall. If an actor increaes hoards by drawing on “…funds that formrely went into consumption…[this] will bringabout a fall in the rate of interest”. Yet how exactly can an exclusive decrease in consumption reduce the natural rate of interest when plain consumer spending (not consumer loans) is not included at all on the aggregate time market figure on page 418?
I’m most certainly way out of my league here (as evidenced by the fact that I only understand about half of the words being said here), but why make a distinction between the widening and deepening of the of productive processes?
And isn’t it lower savings that causes a higher interest rate and higher savings that cause a lower interest rate (all other things being equal of course) and not the other way around?
A distinction needs to be made because one of them is related to the savings rate, while the other is related to the interest rate. It seems that Austrian Capital theory has more or less focused exclusively on changes in the supply of savings and not changes in the demand for P.G, which has led it to make overgeneralizations with regards to the interest rate and savings. A lower interest rate, does not always mean a greater supply of savings, just as a higher interest rate does not always mean a smaller supply of savings. A higher supply of savings (just like a larger quantity of a good) certainly causes a lower interest rate (a lower price), but a higher quantity of savings (good supplied) can be brought about by a shift in the demand schedule as well.
Capital Widening (duplicating existing production processes or creating new ones of similiar length) and Capital deepening (longer production processes that are more productive than existing, shorter production processes because they produce a greater amount of consumer goods or new previously unavailable consumer goods) can certainly occur side by side in the typical Austrian Growth model (decrease in consumption increase in investment), just as the opposite can occur when there is a rise in time preferences. But it since the demand side can also change, a greater quantity of savings can occur with a higher interest rate. An increase in the demand for P.G (brought about by an increase in the labor force) will raise the interest rate and the total quantity of savings. Capital widening will occur as longer production processes are abandoned and those savings are used to pay more money into the worker wage fund and duplicate existing shorter production processes. The exact opposite (a decrease in the labor force) will bring about a reduced width in the capital structure but increased length as resources are taken away from preexisting production processes and used to augment the length of production.
“Rothbard includes the Post Income Demand for Present Goods (money) as on the time market when it is for consumer loans, not the post income demand for Present Goods (buying consumer goods with your existing money stock).”
Post-income demand for present goods isn’t “buying consumer goods with your existing money stock”. Again buying consumer goods with your existing money stock wouldn’t be part of the time market, because it involves exchanging present goods for present goods. Time market exchanges are necessarily intertemporal.
I think the term “post-income” term is throwing you off, because at first face, the term would seem like it’s talking about people getting paid, and then bringing that present money onto the market. But by “post-income” Rothbard is not talking about “after they get paid.” If he was, the only way that “after-they-get-paid” present money could play a role in the time market would be if it were part of the supply part of the time market, because Rothbard formulates the time market such that future goods comprise the demand and present goods comprise the supply. And in that case it would have to be called “Post-Income Supply”.
Again “post-income” does not mean “after they get paid”. It actually means “with reference to them getting paid at some point.” The fact that they do get paid at some point enables them to demand present goods with I.O.U.s. (Notice that in the post-income demand section, Rothbard only ever talks about post-income demanders paying with I.O.U.s). Insofar as we’re talking about post-income demand, we’re talking about people paying for present goods with I.O.U.s (which are future goods). Insofar as we’re talking about pre-income demand, we’re talking about producers paying for present goods with the hired productive services of their land, labor, and capital (which are also future goods). What else could post-income demand for present goods on the time market (which must involve intertemporal exchanges, and therefore must involve a supply comprised of future goods) conceivably be about? What other future goods, with which one can demand present goods, are there besides I.O.U.'s and hired productive services? Certainly not “after-they-get-paid” present cash; present cash is a present good.
Right. This is more or less what I meant earlier, I just worded it very poorly. I wanted to highlight the distinction between consumer borrowing and plain consumer spending with the money an individual owns. I apologize for the confusion. However, this does not change my argument, that Rothbard does not include consumer spending as determining the rate of interest yet later on does when he talks about an individual’s spending habits. Take for example what I quoted earlier.
On a side note, how do people feel about Hulsmann’s assertions that the interest rate and the quantity of savings are not systematically related? Both Salerno and Hulsmann write that demand side considerations on the time market are neglected in modern Austrian Capital theory. Hulsmann is more critical and builds his paper around it, while Salerno does not write the implications and uses his example to critique Garrisons “Secular Growth”. I’m interested to see how Hulsmann’s paper was receieved, however I can’t find many mentions of it.
i’m a big hülsmann fan and in this same vein would also recommend his contribution to the hoppe festscrift: the demand for money and the time-structure of production.