Sorry, that previous answer to Ian's pop quiz was too truncated. I should have said that mainstream theory suggests another possible explanation for positive interest rates that, like explanations based on time or risk preferences, is consistent with the operation of competitive and complete markets. Of course nothing ensures that the relevant markets in which interest rates arise have these "nice" properties. Leaving that restriction aside, mainstream theory could adduce explanations based on market power (e.g., collusive rate-setting) or contractual imperfections (e.g., "efficiency" interest rates, as in the Stiglitz/Weiss model of credit rationing). Gil
>It sounds like Keynes, except he would have criticized "(neo)classical >economics" rather than "mainstream economists"; the latter phrasing sounds >more recent. For what it's worth, mainstream theory suggests another >possible explanation for positive interest rates besides time (and >possibly risk) preference, although it is not one that is typically >emphasized: interest represents a scarcity rent for capital. This latter >explanation is both plausible and consistent with the now much-reinforced >empirical finding of interest-inelastic savings. Gil > > > >>[who said it?] >> >>"...confusion forces practical economists to explain the determination of >>interest by opportunity cost reasoning - a particular rate of interest >>being set by the 'pure' rate yielded by the riskless government bonds, >>with inflation, risk, and administrative cost premia added. But there is >>no watertight justification for the perpetual existence of this 'pure' >>rate. Interest exists because it is there; it is still held up by its own >>theoretical bootstraps. The failure of mainstream economics to explain >>adequately the existence of interest betrays the fact that it is merely a >>theoretical concept with no true basis in reality. It is a figment of our >>collective imaginations." >
