Irving Fisher in The Theory of Interest explained how the price of an asset is its discounted future income stream. He also wrote that what one pays for an asset today for an input whose product is in the future is its discounted price relative to the future price of the product.
Also, said Fisher, the payments to factors such as labor's wages are discounted relative to their future product. So one pays for labor today not its current marginal product, but its discounted marginal product. Since labor gets a uniform wage relative to risk, workers at the second pass, workers shift out of industries with time-distant products and low wages until its marginal product rises to the equilibrium wage. Nevertheless, if factors are paid their discounted marginal products, then wages fall when interest rises, holding constant all other effects. A contrasting proposition is that only assets (stocks) are discounted, whereas factor flows are valued at their current marginal product. What adjusts to the rate of interest is then not factor payments but the price of assets and the choice of what to produce. In that case, wages do not fall when interest rates rise as a result of discounting, but of course interest rates can affect wages in other ways. Which is correct? Are factors paid their discounted or non-discounted marginal products? Fred Foldvary ===== [EMAIL PROTECTED]
