The assumption here is that arbitragers will equalize the rate of interest throughout the time structure (e.g., across short-term and long-term bonds), and that no new knowledge will be created meanwhile.revisit
“The neoclassicists are partly right in only one respect—that the rate of interest in the producers’ loan market is dependent on the rates of return on investment. They hardly realize the extent of this dependence. From the point of view of fundamental analysis, there need not be any producers’ loan market at all.” (pp. 424-425)
“In the ERE, the share market is strictly dependent on the price spreads. If the price spreads are 5 percent, the rate of interest return yielded on the share market (the ratio of earnings per share to the market price of the share) will tend to equal the rate of interest as determined elsewhere on the time market.” (p. 431)
“In essence, the creditor on the prospective loan market is no different from the man who has invested in stock. The difference between investing in stock and lending money to firms is mainly a technical one.” (pp. 436-437)
“The stock market equates the rate of interest on all investments, obliterating the differences in time structure so thoroughly that it becomes difficult for many writers to grasp the very concept of period of production.” (p. 449)
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Related:
- 2-1a0a ‘Occam’s razor’ & ‘Irreducibility’ - Simplify the problem but don’t oversimplify.
- 5-2b5 Theories precede data
- 13-1a3a5.1 The concept of an equilibrium becomes meaningless when knowledge creation is introduced
- 13-5b2h In the evenly rotating economy, the rates of interest will differ in accordance with a psychic component
- 13–5b2i The rate of interest will be uniform in the evenly rotating economy only when everyone becomes the same—i.e., when all individuals have identical time-preference schedules, expectations, and subjective valuations
- 13-5b3c The demand of landowners and laborers for present goods tend to be inelastic with respect to interest rates
- 13-5e The capitalists are constrained by the aggregated time-preference schedules just as sellers of any other present goods are constrained by the aggregated demand schedules of the consumers
- 13-5f The interest rate is determined by the time-preference schedules, rather than vice versa
- 13-5g Do not confuse the effect for the cause—to explain the causality at play, you must explain what must have happened at first and what would have happened in the absence of change