Capital and Interest (lecture 9 of 32)
These are notes from the lecture, Capital and Interest, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Murphy.
Capital Goods vs. Capital Funds
- Capital goods -- machinery, etc.
- Capital funds -- money invested in an enterprise.
- how much you'd get if you sold the business.
- How much you'd get if you liquidated the business and sold all assets less liabilities.
- Aggregations -- many non-Austrians will try to ad up total capital and compare. But, when they start talking about a nation, it is problematic, because Capital means assets you'd get if you sold the business: who would an entire nation sell its goods to, and wouldn't that raise prices?
Background: Classical School
- Classification based on the type of income:
- Land -- rent
- Labor -- wages
- Capital -- interest
Austian Distinctions
- Classification based on how produced:
- Land (natural resources)
- Labor
- Capital (goods) -- "produced means of production"; Rothbard clarifies that it is more correct to call them "reproducible means of production". Capital goods earn no net rent income in the Evently Rotating Economy.
- About people's subjective attitude towards objective things.
- Examples (Frank Fetter): 10% interest rate; machine expires in 2008
Prices 2004 2005 2006 2007 2008 Rental $0 $1,000 $1,000 $1,000 $0 Prchs $2487 $1,735 $909 $0 $0
- PDV = D1/(1+4)^1 + D2/(1+r)^2 + D3/(1+r)^3 . . .
- ROR, rate of return = (D + dP)/P = ($1,000 + $1,736 - $249) / $2,486.85 = 0.1
- 0% interest rate; machine expires in 2008
Prices 2004 2005 2006 2007 2008 Rental $0 $1,000 $1,000 $1,000 $0 Prchse $3,000 $2,000 $1,000 $0 $0
- Suppose the machine becomes twice as productive, with a 10% interest rate, expiring in 2008
Prices 2004 2005 2006 2007 2008 Rental $0 $2,000 $2,000 $2,000 $0 Prchse $4,971 $3,470 $1,188 $0 $0
- Remember, interest rates are determined by time-preference. So, the Classicals were wrong in treating land differently.
- Consider a parcel of land, with a 10% interest rate
Price 2004 2005 2006 2007 2008 Rental $0 $1,000 $1,000 $1,000 $1,000 Prchse $10,000 $10,000 $10,000 $10,000 $10,000
- How much people are willing to pay for it depends on expectations of the future.
Roundaboutness
- The more roundabout processes are, the more efficient and physically productive they are.
- The greater productivity of roundaboutm ethods is why Capital Accumulation generates great wealth.
- In a sense, present goods ahve capital accumulated in them from the distance past.
