Interest rate is the effect, not the cause—at least in the evenly rotating economy ERE (ontologically). That is, the real income increase (in the sense of shifting of time preference schedule per se) doesn’t cause another round of saving—interest rates adjust immediately to reflect the shift of underlying time preferences in the economy, preventing recursive saving loops.
“Many economists have made the great mistake of believing that the interest rate determines the time-preference schedule and rate of savings, rather than vice versa.”
“The intersection of the two curves—supply of present goods and demand for present goods—determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest is determined solely by the time preferences of the individuals in the society, and by no other factor.”
“It is this rate of interest that induces capitalists to save and invest present goods in productive factors.” (p. 403)
Next:
- 13-5f1 You must evoke others to explain the interest rate
- 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
Related:
- In reality
- The case on point: a man must consume—and in some cases his time preference will become infinite regardless of the rate of interest
- Price is also the effect—not the causedevelop
- Price is effect is most evident in barter
- 13-1a3a2e5.1 Money necessarily evokes prices in the past—in barter economy, this is not necessarily the case
- 13-1a3a2e7 Values (and also prices—to the extent that value scales can be ascertained only through them) are not concerned with the past
- 13-8a3 Money must evoke the past, but the demand for money lies in the future
- Yet price can be the cause—this is probably wrong (e.g., see 13-1a3.4 There are no objective or real costs that determine price)develop
- 3-1a4b3 Thomas Sowell - ‘Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.‘
- 10-2g3d1.1 Humans create their own cause
- 13-1a3a4a The actual market prices are the only ones that ever exist
- Consumers’ spending does not induce capitalists to save and invest present goods in productive factors
- On saving
- Shift-of-curve ≠ Along-the-curve changes
- Recursive saving loop doesn’t happen because the rate of interest is the effect of time preferences (at least in the evenly rotating economy):revisit