Under mutualism, absentee ownership is illicit. This includes usury, the lending of money and charging of interest payments. Without lending for interest, there can be no market for loanable funds, and no market interest rate. Without a market rate of interest, there can be no capital valuation, and no measure of profit and loss.
It’s only a relevant criticism of mutualists who oppose the abolition of stickiness in property. Which not all do.
Well stated. This may or may not be relevant but I’ll state it anyways.
Just as a reminder however we must not forget that the “loan market” where interest rates are objectively observable, isn’t set by the supply and demand of loans alone. Instead it is heavily influenced, if not a complete derivative, by the accounting profits of various industries at various stages of production. Opportunity costs drives investment in the direction of the greatest potential for profit. In this way profits ebb and investments are chased elsewhere, overtime. The loan market is competing with the markets of various industries. When it comes to interest, what your seeing is just the tip of the iceberg.
(After thought, this is why a stock exchange is so radically valuable to a capitalist ic society)
Back to the OP however, if the loan market was somehow abolished, even if mistakingly by attempting to socialize it. It would be a fallacious attempt without also controlling the investments in various stages of production. Otherwise savers(capitalists) will just find different more colorful, though less efficient, ways of employing their capital.
Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto
Another side note,
Interest(Usury) is a praxeological concept, it simply cannot be abolished.
@ filc
How could entrepreneurs know whether the ‘pure rate of profit’ was 5% or 10%? A massive compilation of statistics?
How could you know if your rate of return was less than the overall rate of return throughout the economy (a loss)?
During the boom stage of a business cycle, why are entrepreneurs fooled by interest rates lower than the ‘pure rate of profit’? Couldn’t they just look at the present rate of consumption vs. saving within the economy?
“Although this interest rate is not directly observable in the market, and even though in each company and in each specific production process it incorporates important external factors (such as the components of pure entrepreneurial profits or losses, and the risk premium), the profit generated in each stage of the entire economic system would tend to correspond to the interest rate, due to the typical entrepreneurial process of equalizing accounting profits over the different stages of the productive structure, assuming no further changes occur and all creative possibilities and opportunities for entrepreneurial profit have already been discovered and exploited.”
What happens if the last condition does not hold? How could anyone determine the ‘pure rate of profit’?
How could you evaluate the opportunity cost between an investment which earns a 20% return in one year and an investment which earns 30% return in two years?
How are entrepreneurs supposed to know what the real savings is within an economy? When you own a store, for example, and there becomes an increase in volume of customers buying your products, naturally, you are going to either increase the prices to keep yourself from running empty shelves or increase your inventory. It doesn’t matter whether the customers are increasing demand through the home equity line of credit they have or a credit card because either one is going to give them the ability to create a demand for your product. So you really almost have no choice but to get suckered into this whole mess because if you don’t take action by either increasing prices or inventory, the other business owner will and will drive you out of business anyway.
I thought I was actually being original here. But Rothbard has already made similar and more general criticism in MES.
http://mises.org/rothbard/mes/chap9c.asp#3D._Market_Calculation
D. Market Calculation and Implicit Earnings
We have seen that a musician or a doctor earns wages without being an employee; the wages of each are implicit in the income that he receives, even though they are received directly from the consumers.
In the real world, each function is not necessarily performed by a different person. The same person can be a landowner and a worker. Similarly, a particular firm, or rather its owner or owners, may own land and participate in the production of capital goods. The owner may also manage his own firm. In practice, the different sources of income can be separated only by referring to these incomes as determined by prices on the market. For example, suppose that a man owns a firm which invests its capital, owns its own ground land, and produces a capital good, and that he manages the plant himself. He receives a net income over a year’s period of 1,000 gold ounces. How can he estimate the different sources of his income? Suppose that he had invested 5,000 gold ounces in the business. He looks around at the economy and finds that what he can pretty well call the ruling rate of interest, toward which the economy is tending, is 5 percent. He then concludes that 250 gold ounces of his net income was implicit interest. Next, he estimates approximately what he would have received in wages of management if he had gone to work for a competing firm rather than engaging in this business. Suppose he estimates that this would have been 500 gold ounces. He then looks to his ground land. What could he have received for the land if he had rented it out instead of using it himself in the business? Let us say that he could have received 400 ounces in rental income for the land.
Now, our owner received a net money income, as landowner-capitalist-laborer-entrepreneur, of 1,000 gold ounces for the year. He then estimates what his costs were, in money terms. These costs are not his explicit money expenses, which have already been deducted to find his net income, but his implicit expenses, i.e., his opportunities forgone by engaging in the business. Adding up these costs, he finds that they total:
Thus, the entrepreneur suffered a loss of 150 ounces over the period. If his opportunity costs had been less than 1,000, he would have gained an entrepreneurial profit.
It is true that such estimates are not precise. The estimates of what he would have received can never be wholly accurate. But this tool of ex post calculation is an indispensable one. It is the only way by which a man can guide his ex ante decisions, his future actions. By means of this calculation, he may realize that he is suffering a loss in this business. If the loss continues much longer, he will be impelled to shift his various resources to other lines of production. It is only by means of such estimates that an owner of more than one type of factor in the firm can determine his gains or losses in any situation and then allocate his resources to strive for the greatest gains.
A very important aspect of such estimates of implicit incomes has been overlooked: there can be no implicit estimates without an explicit market! When an entrepreneur receives income, in other words, he receives a complex of various functional incomes. To isolate them by calculation, there must be in existence an external market to which the entrepreneur can refer. This is an extremely important point, for, as we shall soon see in detail, this furnishes a most important limitation on the relative potential size of a single firm on the market.
For example, suppose we return for a moment to our old hypothetical example in which each firm is owned jointly by all its factor-owners. In that case, there is no separation at all between workers, landowners, capitalists, and entrepreneurs. There would be no way, then, of separating the wage incomes received from the interest or rent incomes or profits received. And now we finally arrive at the reason why the economy cannot consist completely of such firms (called “producers’ co-operatives”).[54] For, without an external market for wage rates, rents, and interest, there would be no rational way for entrepreneurs to allocate factors in accordance with the wishes of the consumers. No one would know where he could allocate his land or his labor to provide the maximum monetary gains. No entrepreneur would know how to arrange factors in their most value-productive combinations to earn the greatest profit. There could be no efficiency in production because the requisite knowledge would be lacking. The productive system would be in complete chaos, and everyone, whether in his capacity as consumer or as producer, would be injured thereby. It is clear that a world of producers’ co-operatives would break down for any economy but the most primitive, because it could not calculate and therefore could not arrange productive factors to meet the desires of the consumers and hence earn the highest incomes for the producers.
I’m sorry jmorris, but I don’t understand exactly what your argument is. Why does a business owner have no choice but to get suckered into malinvestment?
“Pure Rate of Profit”.
To an austrian, the correct term would be “Interest”. “Rate of Profit” is a meaningless term. Business is only concerned with profit and loss. We must be carful not to conflate the business and financial understanding of interest, and the economic understanding of interest. Taking care not to imply rules of finance when discussing broad concepts such as economy’s. Point being, business’s are concerned with profit.
This statement is meaningless as there is no such thing as an overall rate of return. The market’s interest rates are not homogeneous, but instead profitability varies from industry to industry, changing from one stage of production to the next.
There is no such thing as a single rate of interest. The market is not always in equilibrium, but instead always trying to obtain equilibrium. It’s false to assume that the entire market operates at 1% or 10% interest. It is not uniform. Certain stages of production are more profitable then others, investments swell in the direction of profitability, which over time ebbs profits causing investments to move elsewhere.
Instead of thinking of interest across the market as a static linear value that everyone follows, consider it instead as a wave. Where rates of return may be low for certain stages of production, while high for others. As investments move around equilibrium is chased, and those value’s are adjusted. Sometimes the wave is reversed even. ect…
The statement “is the overall rate of return greater than market interest” is meaningless. Compiling an arbitrary universal market rate of interest serves no purpose. It’s like asking if the overall profit is greater than market profit. The term “Market profit” in this case meaning implying some form of profit median, or profit average, it’s a disjointed concept employed by people that are confused about what profit or interest is.
Just as there is no universal market interest rate, there is no universal price of apples.
Assuming no inflation, accountants only need to be concerned with profit. Profit is interest.
Lets not get ahead of ourselves. This question is meaningless if one does not understand profit and interest.
Profits are not measured at variable lengths. The accounting industry is fairly uniform in this regard. Returns are checked annually and consistently.
“Pure Rate of Profit”.
To an austrian, the correct term would be “Interest”. “Rate of Profit” is a meaningless term. Business are only concerned with profit and loss. To a business, profit is interest, interest is profit.
I am well aware of the distinction.
How could you know if your rate of return was less than the overall rate of return throughout the economy (a loss)?
This statement is meaningless as there is no such thing as an overall rate of return. The market’s interest rates are not homogeneous, but instead profitability varies from industry to industry, changing from one stage of production to the next.
There is no such thing as a single rate of interest. The market is not always in equilibrium, but instead always trying to obtain equilibrium. It’s false to assume that the entire market operates at 1% or 10% interest. It is not uniform. Certain stages of production are more profitable then others, investments swell in the direction of profitability, which over time ebbs profits causing investments to move elsewhere.
Instead of thinking of interest across the market as a static linear value that everyone follows, consider it instead as a wave. Where rates of return may be low for certain stages of production, while high for others. As investments move around equilibrium is chased, and those value’s are adjusted. Sometimes the wave is reversed even. ect…
The statement “is the overall rate of return greater than market interest” is meaningless. Compiling an arbitrary universal market rate of interest serves no purpose. It’s like saying is the overall profit greater then market profit. The term “Market profit” as some form of profit mediun, or profit average, it’s a disjointed concept employed by people that are confused about what profit or interest is.
OK. How could you know if your rate of return on an investment was less than the pure rate of interest (a loss)? There is a general tendency toward covergence on a single rate of interest.
During the boom stage of a business cycle, why are entrepreneurs fooled by interest rates lower than the ‘pure rate of profit’? Couldn’t they just look at the present rate of consumption vs. saving within the economy?
Lets not get ahead of ourselves. This question is meaningless if one does not understand profit and interest.
During the boom stage of the business cycle, why are entrepreneurs fooled by manipulated interest rates lower than the pure rate of interest? Couldn’t they just look at the present rate of consumption vs. saving within the economy?
How could you evaluate the opportunity cost between an investment which earns a 20% return in one year and an investment which earns 30% return in two years?
Profits are not measured at variable lengths. The accounting industry is fairly uniform in this regard. Returns are checked annually.
Some processes of production are more roundabout than others. The capital value of each project depends on the interest rate it is discounted at. And it cannot be calculated without knowing the interest rate.
I have to admit that it was incorrect to say business owners have “no choice.”
Sorry Stephen, I’m having a difficult time identifying what is a response from you, and what was stated above.
As I somewhat eluded to stating before, I don’t know what your saying when you say “Pure rate of interest”. Whats the pure rate of profit? The term seems disjointed to me.
I am not sure what your referring to when you say “Interest Rate”. I am unclear as to what you mean when you say “Capital value of each project”. What project?
Capital goods and equipment are appraised on the market using prices established on the market. The appraised value of a factory, for example, is equal to however much it’s expected to fetch in money if the unit were sold today. The price of capital goods trend toward the direction of expected profitability. However this is not where interest comes from. The desirability of present goods over future goods remains, so despite this fact a business can still receive accounting profits. This is interest. This varies based on several factors. Supply, demand amongst industries, profitability over time via various stages of production, and general consumer time preference.
See page 334 on Money, Bank Credit, and Economic Cycles for a visual explanation.
How do you “measure” the demand for future goods? This requires (a) cardinal utility and (b) stable preferences. You might as well ask, “couldn’t the state just measure the demand for apples and the supply of apples and set the equilibrium price?”
You can’t, of course (are your questions rhetorical?). The market attempts to match the market rate of interest to the natural rate but never succeeds.
Sorry Stephen, I’m having a difficult time identifying what is a response from you, and what was stated above.
As I somewhat eluded to stating before, I don’t know what your saying when you say “Pure rate of interest”. Whats the pure rate of profit? The term seems disjointed to me.
I was being too loose with my terminology before and I think created some confusion. So I restated the question in standard Austrian terminology. The pure rate of profit and pure rate of interest are actually the same thing. The term profit is used in accounting differently than it is used in AE. For accounting, profit is just the income you derive from your business. It is the spread between your revenue and your expenses. For AE, it is your revenue minus expenses, minus the pure rate of interest, minus any risk premium, minus any social disutility premium for employing your capital in a socially disliked line of investment, minus any implicit wages or rent which you earn, minus your implicit ownership-decision making earnings.
By pure rate of interest, I mean the price spread between the various stages of production divided by time if we were in an ERE.
I am not sure what your referring to when you say “Interest Rate”. I am unclear as to what you mean when you say “Capital value of each project”. What project?
In the present context, it should be obvious that investment and project are the same thing.
Capital goods and equipment are appraised on the market using prices established on the market. The appraised value of a factory, for example, is equal to however much it’s expected to fetch in money if the unit were sold today. The price of capital goods trend toward the direction of expected profitability. However this is not where interest comes from. The desirability of present goods over future goods remains, so despite this fact a business can still receive accounting profits. This is interest. This varies based on several factors. Supply, demand amongst industries, profitability over time via various stages of production, and general consumer time preference.
See page 334 on Money, Bank Credit, and Economic Cycles for a visual explanation.
The market price of a good and the capital value of a good are not the same thing. The price of a factor of production is determined by its DMVP. The capital value (NPV in finance) of an investment is determined by the sum total of all cash flows each discounted by interest.
I hope that puts us on the same page.
My only point is that it is enough to abolish the loan market, to make it impossible for entrepreneurial calculation to occur.
Yea I don’t see how this follows.
I went off on the prior tangent because you made it sound like interest only resulted from the loan market alone, and had no external influences. I guess it depends on what you mean by “loan market”. The superficial loan market that consumers are most accustomed to dealing with isn’t necessary for market interest to establish itself.
However, if what you mean by "loan market’ is the entire stock market, well then yes I could start to see your point. I guess I’m getting hung up on the usage of the word “loan market”. However in this case, if savers are not allowed to sell their savings to spenders, well the entire capitalist structure has just fallen apart. Not only would we not have interest, all forms of exchanges would deterred and economic calculation in general would be disrupted at that point.
Am I following you now?
Me:My only point is that it is enough to abolish the loan market, to make it impossible for entrepreneurial calculation to occur.
You*:Yea I don’t see how this follows.*
I went off on the prior tangent because you made it sound like interest only resulted from the loan market alone, and had no external influences. I guess it depends on what you mean by “loan market”. The superficial loan market that consumers are most accustomed to dealing with isn’t necessary for market interest to establish itself.
It follows because you can’t have economic calculation without prices (In this case, a price for time vis. a vis. present vs. future goods), and you can’t have prices without a market.
I never said anything about interest resulting from a loan market.
You: However, if what you mean by "loan market’ is the entire stock market, well then yes I could start to see your point. I guess I’m getting hung up on the usage of the word “loan market”. However in this case, if savers are not allowed to sell their savings to spenders, well the entire capitalist structure has just fallen apart. Not only would we not have interest, all forms of exchanges would deterred and economic calculation in general would be disrupted at that point.
Am I following you now?
The stock market is not a loan market. It’s a capital, or equity market. The bond market is a part of the loan market, as are all personal and commercial loans whether offered by person’s or institutions. Any exchange of present money for an agreement to pay it back plus some additional amount is part of the loan market.