Post
Topic
Board Economics
Re: Growth, Interest and Wage Inequality - To the austrian economists here
by
cartman
on 13/07/2011, 17:05:53 UTC
It seems that growth leads to inequalities, but they're later reduced by competition and by workers moving to other sectors.

exactly. What my theorey would predict is, that every time, a great invention is made, there is a phase of higher inequality until the full potential is reached. After that, you have enough programmers, special engineers etc. I would name this a Kondratiev wave of inequality. 

The relationship between growth and interest is not trivial for me. Can you elaborate on this?
How is this related with the time preference theory?

Its perfectly related I think:

All entrepreneurs and businessmen decide, how much capital they need and what price they are willig to pay (maximum their expected returns of investment). When there is a lot of growth in the economy - probably due to a new sector emerging - there is a lot of demand for money in the market. The price (interest) is given by supply and demand. Imagine Google offering 20% interest if you give them your money, this would convince a lot of people to supply their beloved money for some time. So some really profitable entrepreneur is always given money if he can "outbid your timepreference".
Here you can also derive the growth-interest-relation. If there are 9 companies having returns of 5% and one company having a return of 4%, the latter might be outbidden by the others when interest rate climbs towards 5%. As 5% ist reached, there is an equilibrium in the moneymarket and the 9 companies won't borrow more money, unless supply increases (and interest frate drops) or their expected return rises beyond 5%. So growth determines the interest rates (as long as central banks leave their noses out) into an equilibrium where there are only companies beyond that interest rate. One could disagree and point out to the moneysupply as the second determinant, but I somehow assume the supply curve to be fix and supply is determined by demand, because I dont have an idea yet, how supply would be varied exogenously in a theoretical freemarket framework. (Maybe this assumes a natural savings rate curve) This might be a problem if inventions and growth opportunities also affect saving behavior. but this argument might be circular.