DemocracyThe God That Failed Read Online Free PDF Page B

investment (i.e., the demand for present goods thought capable of yielding future returns).
    No supply of loanable funds can exist without previous savings, i.e., without abstaining from a possible consumption of present goods (an excess of current production over current consumption). And no demand for loanable funds would exist if no one perceived an opportunity to employ present goods productively, i.e., to invest them so as to produce a future output that would exceed current input. Indeed, if all present goods were consumed and none invested in time-consuming production methods, the interest rate would be infinitely high, which, anywhere outside of the Garden of Eden, would be tantamount to leading a mere animal existence, i.e., eking out a primitive subsistence living by encountering reality with nothing but one's bare hands and a desire for instant gratification.
    A supply of and a demand for loanable funds only arise—and this is the human condition—if it is recognized first that indirect (more roundabout, lengthier) production processes yield a larger or better output per input than direct and short ones. 3 Second, it must be possible, by means of savings, to accumulate the amount of present (consumption) goods needed to provide for all those wants whose satisfaction during the prolonged waiting time is deemed more urgent than the increment in future well-being expected from the adoption of a more time-consuming production process.
    2 Mises, Human Action, pp. 483 and 491.
    3 To be sure, not all lengthier production processes are more productive than shorter ones, but under the assumption that man, constrained by time preference, will invariably (and at all times) select the shortest conceivable methods of producing some given output, any increase in output then can—praxeologically—only be achieved if the production process is lengthened, given constant technology

    So long as these conditions are fulfilled, capital formation and accumulation will set in and continue. Land and labor (the originary factors of production), instead of being supported by and engaged in instantaneously gratifying production processes, are supported by an excess of production over consumption and employed in the production of capital goods. Capital goods have no value except as intermediate products in the process of turning out final (consumer) goods later, and insofar as the production of final products is more productive with than without them, or, what amounts to the same thing, insofar as he who possesses and can produce with the aid of capital goods is nearer in time to the completion of his ultimate goal than he who must do without them. The excess in value (price) of a capital good over the sum expended on the complementary originary factors required for its production is due to this time difference and the universal fact of time preference. It is the price paid for buying time, for moving closer to the completion of one's ultimate goal rather than having to start at the very beginning. For the same reason, the value of the final output must exceed the sum spent on its factors of production (the price paid for the capital good and all complementary labor services).
    The lower the time-preference rate, the earlier the onset of the process of capital formation, and the faster the roundabout structure of production will be lengthened. Any increase in the accumulation of capital goods and the roundaboutness of the production structure in turn raises the marginal productivity of labor. This leads to either increased employment or wage rates, or even if the labor supply curve should become backward sloping with increased wage rates, to a higher wage total. Supplied with an increased amount of capital goods, a better paid population of wage earners will produce an overall increased—future—social product, thus also raising the real incomes of the owners of capital and land.
    Factors Influencing Time Preference And The Process Of