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Source link: http://archive.mises.org/12714/role-of-interest-in-entrepreneurial-calculations/

Role of Interest in Entrepreneurial Calculations

May 14, 2010 by

The drop in interest rates makes unrealizable projects appear profitable and realizable. Entrepreneurs embark upon the execution of such projects. Business activities are stimulated. A boom begins. FULL ARTICLE by Ludwig von Mises

{ 5 comments }

fundamentalist May 14, 2010 at 11:43 am

While it’s true that a rise in market interest rates will bust the boom, Hayek shows in “Profits, Interest and Investment” that the boom will bust even if market interest rates don’t rise. Hayek doesn’t contradict Mises; he just fills in some details. According to PII, rising consumer prices increase profits in consumer goods, while rising factor costs reduces profits in producer goods, so investment switches to consumer goods and employment falls in producer goods even if interest rates don’t rise. I think this is an important detail to the business cycle because the Feds don’t raise interest rates until the boom is well under way. Then it raises rates cautiously and much to slowly for them to have the desired effect. And the lag between policy and effect is quite long, up to four years. So interest rates are a poor signal for the coming bust. Profits are a much better guide. When investors hail record profits in consumer goods and retail, the end is near.

Smack MacDougal May 14, 2010 at 1:58 pm

Mises had great insight into credit-driven expansion as expressed in his Trade (Business) Cycle Theory.

However, Mises did not understand interest whatsoever. His “originary interest” amounts to off-the-deep-end foolery. Mises throws out the window the Law of Prices when it comes to interest and instead throws in some crazed false belief called originary interest as his driver.

The Law of Prices is the bedrock for all of economics. If the Law of Prices does not apply to every economic phenomenon in exactly the same way, then it is not a law.

All right-minded persons at once should see these truths: worth happens in the mind; value arises solely from exchange (Law of Value); the summation of want for a thing is demand; the intersection of demand with supply sets the price (Law of Prices) irrespective of whether any individual supplier earns a profit or suffers loss because that supplier cannot cover the cost of production.

Michael A. Clem May 14, 2010 at 5:08 pm

What’s your problem? Originary interest is the value a person places in present consumption over future consumption? It IS a price, set by the consumer. Ultimately, interest is the intersection between supply (savings) and demand (loans). So there’s no contradiction with what Mises is saying and what you are saying.

Inquisitor May 15, 2010 at 12:20 am

Seems he has no idea what Mises is saying.

newson May 15, 2010 at 1:09 am

too much smack evidently.

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