270 Monetary theory

a role in intermediating the consumers’ demands for waiting embodied in the
final goods back to the ultimate suppliers of waiting, which could be the firm’s
owners. Links in a chain of intermediation involve both demanding and supplying
waiting. Intermediation and arbitrage in waiting are closely related activities.


The concept of waiting permits bypassing some distracting and often irrelevant
questions associated with a physical conception of ‘capital’. For example, what
types of goods – plant and equipment, inventories of consumer goods and other
goods in the hands of producers, durable and nondurable goods in the hands of
consumers and improved and unimproved land – should and should not count
as capital? Because of such puzzles about classification and for other reasons,
the concept of an aggregate of physical capital is inherently fuzzy. Some capital
goods are always being worn out and scrapped, and new and different ones are
always being constructed. Whether the aggregate is growing or shrinking or
staying unchanged may be hard to say, especially since unforeseen changes in
technology and tastes are always occurring and raising or lowering the market
values and the genuine usefulness of particular capital goods.3
Nobody conducts transactions in the aggregate of capital goods, and the
prices at which individual capital goods are bought and sold are quite distinct
from the interest rate. Waiting for value over time is something more nearly
homogeneous than physical capital. It commands a price of the same nature
whether it is devoted to fresh accumulation or mere maintenance of physical
capital or is used in other ways. In several contexts then, the concept of waiting
spares us from trying to distinguish between capital goods and other goods,
gross and net production, maintenance and accumulation, and gross and net
saving and investment. Those distinctions are vital in dealing with some
questions, but they are irrelevant distractions in dealing with some central
questions of the nature and functions of the interest rate.
A person can perform waiting and so promote the maintenance or accumu-
lation of physical capital even by just continuing to own a capital good or plot
of land or other asset instead of selling it and spending the proceeds on current
consumption. The rate of return or interest rate he receives is expressed by the
relation between the value of the services of the asset, net of depreciation and
the like, and the value of the asset itself.
One might object that the asset will continue to exist whether or not its current
owner sells it and spends the proceeds on consumption. How, then, does his
continuing to own it promote maintenance or accumulation of physical capital?
Most obviously, the owner is not engaging in consumption that he might have
engaged in and is not bidding resources away, as he might have done, from

with opposite changes occuring in the trade of the lending country. owning capital goods and doing other quite unmysterious things.B. Interest rate theory 271 maintenance or accumulation of physical capital. Its owner promotes accumulation of physical capital by holding it. 266–7). the financial side of the capital movement develops its real counterpart. The recommended view of the interest rate as the price of waiting in no way entails slipping into the sort of mysticism attributed to J. especially p. pp. Clark and Frank Knight and criticized by Hayek (1936 [1946]. Like other factors. Through the processes of overall balance-of-payments adjustment. We need not conceive of waiting as a sort of abstract homogeneous quantity or fund enduring through time and embodying itself in a changing assortment of physical capital goods. People in the lending country are giving up and people in the borrowing country are acquiring something more abstract – current command over goods or resources in general. So doing. One complication involves land. However. pp. 1941. In an extreme case the borrowing country might develop a net inflow of goods and services entirely by reduction of its exports. nev- . this is not necessary. People supply waiting by refraining from currently consuming their entire incomes and wealth and by making loans. the borrowing country could experience a rise in imports or fall in exports of services. 93–4. 5. 355–83. too. 377. While in general the borrowing country increases its imports and reduces its exports. His selling the asset would tend to depress the prices of it and competing assets. Waiting can be productively employed in largely nonmaterial ways. raising their MERs and tempting people desiring such assets to buy them rather than construct them afresh. In all such cases. they contribute by and large to the maintenance or accumulation of physical capital. as in the training of human beings and in research. The ‘real transfer’ could take place even if no capital goods and no tangible goods were traded internationally. imbalance on capital account tends to be matched by opposite imbalance on current account. some waiting is devoted directly to consumption: consumer loans are analogous to labor in domestic service and to land maintained for pleasure as gardens or wilderness. Capital movements are not shipments of capital goods in particular. the demand for land as a hedge in times of inflation represents some diversion of people’s propensity to save and accumulate wealth away from construction of capital goods or from the purchase of bonds issued to finance them (see pages 219–20 above). The concept of waiting has the further merit of helping us avoid overem- phasis on physical capital formation. INTERNATIONAL MOVEMENTS OF CAPITAL AND GOODS International capital movements pose another test of alternative conceptual- izations. among others.

and where there is no collectively organized or family-centered social security system. Alternatively. The interest-equalization tendency does not depend on whether waiting enters directly or only indirectly into production functions of goods. shrinking the domestic industry. Waiting formerly devoted to the maturing of wine is freed for other uses. which like wine require time to mature. where no money and no equity securities exist. That possibility shows by the way that waiting need not imply irksomeness and that time preference – the IRD in terms of Chapter 2 – need not necessarily be positive at the margin. reducing the price premium of matured over new wine in the home country and shrinking production of matured wine there. Trade tends to equalize product prices. NEGATIVE INTEREST The concept of waiting helps make the unreal but instructive case of a negative interest rate conceivable. Now trade opens up. What difference does any of this make for the interest-equalization tendency? Suppose widgets are expensive because their costs include high salaries corresponding to the expensive waiting invested in training technicians.272 Monetary theory ertheless. Waiting formerly devoted to training technicians becomes free for other purposes and as in the wine example the interest rate falls. Perhaps waiting enters directly into the production of widgets. The conception of capital as waiting also integrates smoothly with the theory of how under certain conditions international trade tends to equalize the prices in different countries of the factors of production ‘embodied’ in the goods traded. the lenders are waiting to exercise command over real resources. Still another possibility is that widgets are made by specialists who must undergo years of expensive training. If waiting is relatively scarce and the interest rate relatively high in the home country. Now international trade brings imports of cheap foreign widgets.5 We consider an isolated community where all goods produced are perishable. and the borrowers are obtaining advanced command over them. Trade lessens the effective scarcity of waiting and so reduces the home interest rate. Consider new wine and matured wine produced with relatively little and relatively much waiting. where waiting is relatively abundant and cheap. The home country imports high-waiting-content matured wine and exports low-waiting-content new wine (or vodka or other low-waiting-content goods). We assume a stable population of . matured wine commands only a relatively small price premium. widgets are manufactured with machines that embody much waiting. where land is either superabundant and free or else not subject to private ownership. Abroad.4 The opposite occurs abroad. matured wine commands a correspond- ingly large price premium over new wine in the absence of trade.

and in his later working years he must consume an amount that falls short of his current income by more than his earlier excess consumption. People differ only in belonging to different generations. The perishability of all goods implies that waiting has negative marginal productivity. money and scarce privately ownable land. The typical person must borrow goods in his early working years. as serves our purpose in this section. The . Only a negative interest rate can clear the loan market. With accumulation of wealth in other forms ruled out. (In the absence of money.6 All this is easy to say in terms of waiting. How can anyone provide for his old age? Retired people cannot live by borrowing because they would be in no position to promise repayment. Each person’s total production and earnings are the same. Considering the odd conditions necessary for a negative interest rate helps us see. loans are expressed in particular commodities or in composite baskets of commodities. desired lending would exceed desired borrowing. by contrast. People in their late working years are willing to pay young people to take loans from them so that they can live on the repayments in retirement. So strict an assumption is not really necessary. He wants to make loans in each of his two working periods and to receive repayments in retirement. but it is convenient in helping to rule out a positive rate of interest. both repay this borrowing and lend goods in his later working years. Only a reward for borrowing would persuade people to consume especially heavily in their early working years. Prospects of old age make people want to postpone consumption of part of their current incomes. so are a negative marginal productivity and a negative wage rate of labor in a particular occupation. including time preferences. at corresponding periods of their lives. Yet they are able to wait by making loans only if younger people accommodate them by borrowing. why the interest rate is almost always positive in the real world. in both working periods of his life. Interest rate theory 273 uniform age distribution and abstract from any differences in people’s tastes. furthermore.7 Among its other features our imaginary economy lacks storable goods. In his early working years he must consume in excess of his current income. the only way to store up command over goods to be consumed later is to acquire claims on borrowers. With all people having preferences of this sort. The desired supply of waiting by lenders exceeds the volume demanded by borrowers at a zero interest rate. The rate must be negative in order to persuade people to depart from their otherwise preferred more equal distribution of consumption over their adult lifetimes. In retirement he consumes only the repayments of loans he made in his late working years. Clearing the market requires that waiting be penalized and accommodating it rewarded. however. and receive repayment when retired.) At a zero interest rate the typical person wants a nearly even distribution of consumption over his lifetime. Just as a negative price of waiting is conceivable.

Our purpose is not to dwell on these odd cases but only to point out that the supply-and-demand theories of the prices of waiting and of labor apply even to them. and workers in it might live on wealth from other sources. The relative strengths of consumer demands for goods embodying relatively large amounts of particular factors affect producer demands for those factors and so affect their prices. that is if the wage were negative. This point was illustrated in the example of matured wine. On the supply side we can examine why in general and at the margin waiting will not be performed free. (Compare Alchian. ‘Roundaboutness’ is the opportunity to get greater results from present resources if one can wait a longer rather than a shorter period for those results (see Böhm-Bawerk. Some comments are in order on the productivity of waiting or roundabout- ness. whose importation from abroad reduces the demand for its domestically produced counterpart. 39 and George 1898 [1941]. 1959. DERIVED DEMAND AND PRODUCTIVITY A more general argument for the concept of waiting is that it enlists supply- and-demand analysis as illustrated in the preceding section. On the demand side we can examine why people will pay to avoid waiting and gain advanced availability of command over resources. Adelman (1972. pp. The area over which oil migrates . 1959). A shift of consumers’ demand away from low-waiting-content vodka toward high-waiting-content wine tends to raise the interest rate. Except for consumption loans. 31–5. the smaller is the quantity of inputs other than waiting required. pp.) The house probably could be built in only five days as a stunt. 63) notes an example of factor substitutabil- ity in the oil industry: The productivity of a pool is less than proportional to the number of wells because past a certain point there is well ‘interference’. Consider a house of definite specifications to be delivered to the buyer on a definite date. output of consumer goods – and from consumers’ demand for that output. A decline in consumer demand for a highly waiting-intensive good tends to lower the rate of interest. 19. but imagine the attendant inefficiencies and expense.274 Monetary theory occupation might be particularly enjoyable or afford particularly valuable training. we can explore as we do for other factors of production what accounts for the supply and for the demand. and in parallel ways. In considering what determines the price of waiting. 369–70. the demand for waiting as for labor and land use derives from the factor’s capacity to contribute to output – ultimately. The sooner (within limits) construc- tion can begin and so the more time it can take. especially pp. Employers would tolerate counterproductive overcrowding if paid to do so.