Hey guys, it’s me again with another question (or possible spotted contradiction) about Rothbard’s MES.
About a month ago I posted a thread on here about Rothbard not correctly considering the I.R and its relationship to the aggregate proportion of consumption/savings-investment. The thread never got going, and I was (and still am) busy with schoolwork, so I let the matter sit. So I recently dediced to reread Ch.6 and 8 and see if I better understand Rothbard and try to apply some applications to his framework.
On page 388, he has a basic diagram depciting the aggregate time market curves in the economy. Simplfying it, the graph can depict the production process for any one stage/good. Capitalists supply P.G($) for O.F’s F.G (the $ earned from selling the future product). Due to time preference, capitalists discount the money earned from the sale, and as such discount the MVPs imputed from the Original factors land and labor. Although its never really stated like this by Rothbard, the way I understand the graph is that if the discount is too high (meaning rents paid to factors are “too low” and interest returns very attractive), Q.S>Q.D and the excess savings will bid up the factor prices (decreasing the interest discount on their MVPs) until equilibrium. Too low of a discount (a shortage of funds) is the opposite. As the economy tends to the ERE the abnormalities in discounts will be neutralized and all shortages/surpluses eliminated in a given market.
Aggregating this process for the whole economy (and adding in consumer loans), we get the full determination of the interest rate and the total quantity of savings. (shown by Rothbard on page 418). Note that this is is where the real interest rate is determined-not on the loan market, and this equilibrilation in Rothbard’s framework provides the interest rate that is the price spread in the ERE. Notice that the demand curve slopes downward, this might seem trivial, but concerning time preference curves it means that at lower rates of interest (lower discounts=higher wages), Original factors will demand more P.G for F.G, i.e, work more, and the total quantity of savings going to O.F will increase. This isn’t to say that their revenue will increase (D.C could be inelastic), but the quantity of savings demanded going to O.F, just like the quantity of any good, will always either stay the same or increase as price decreases.
So setting aside some other problems I have with Rothbard in Ch.6, in Chapter 8 he analyzes changes in time preference and how this affects the interest rate/structure of production. When talking about factor incomes, he mentions that when consumption decreases, the “fund” out of which O.F are paid, decreases. So, at the lower rate of interest and higher quantity of savings in Rothbard’s new economy, the O.F’s earn less money. Looking back at what was stated above in bold, how exactly is this possible? Looking at the graph on page 418, an increase in savings (a shift in the supply schedule), lowers the rate of interest and quantity saved. Netting out the derived demand by capitalists at each stage of production, how exactly can at this lower rate of interest the quantity saved in the form of factor payments decrease? That makes no sense given a downward sloping demand curve. Either I missed something here, Rothbard’s framework also implicitly assumes a leftward shift in the demand for P.G (at least for the O.F), or Rothbard committed a serious contradiction.
Hopefully I screwed up somewhere and this can be resolved easily.
Thanks for the responses