THE NET THAT SHALL ENMESH THEM ALL

Now, the foregoing may be all well and good, but it is also the case that any such consignment of goods is open to a multitude of what economists call ‘rivalrous’ uses. If this is not true for that rare, individual batch of highly purpose-specific goods which we may have under consideration in some particular instance it will nonetheless still hold for the earlier, typically less use-constrained goods of which that batch is partially comprised, as well as for the later, more shop-ready goods to which it will in turn give rise and whose own market valuation, as we have seen, will help determine the price of their antecedents

Thus, it is the case that today’s producer good, needing to be bid away from an alternative use, must be deemed to be able to give rise to either a slug or a stream of future consumables just greater in cumulative, time-weighted value than it would in alternative hands, whether the last, most eager man whom we outbid in order to secure them intended them for a different productive end or for one involving immediate, exhaustive consumption.

Stated like this, it may all sound all very abstract, so let us try to illustrate it in more readily comprehensible terms.

Imagine that I come across a full-grown chicken, priced at $10 today and I estimate that it will lay eggs which I can later sell for at least $1.10. In such a circumstance, I will not baulk at paying up to a 10% interest rate for the loan of the money with which to buy the chuck and thus to tide me over the egg production cycle.

However, in order for me to do so, it also has to be the case that the second most insistent bidder, the man whom I beat out at my bird’s auction, must not think he can make chicken sandwiches which sell for more than that same $1.10 or which he reckons can be made ready and delivered to his customer in a shorter time than it takes for the hen to lay my own saleable eggs. If he does, he will either outbid me for the hen or outbid me for the loan.

Nor can he be someone fancying the fowl for tonight’s dinner who values it more highly than the specimen weighing 10% more (or my eggs or my other rivals’ sandwiches) which might otherwise land on his table after an equivalent period of delay. If he had such an appetite, he would at once cancel the new savings he was previously intending to make, or liquidate the ones he has made in time gone by, in order to make his purchase of poultry.

In fact, such a man might even be inclined to take the other side of the trade from some third party who does still wish to defer consumption and thus borrow, against a promise of some other, future act of redemption, the consideration he requires to see me off.

In each of these cases, my competitor – whether would-be producer or aspiring end-consumer – would pay up and exclude me from the market if he thought he could be more productive of value in the same time horizon (or productive of the same value over a shorter one), or if he were more dismissive of future consumption opportunities in comparison to current ones (i.e., if his time preference were higher than mine).

Whether you look at it from the side of the funding being taken up or from that of the bird for which I, too, sought to acquire such monies, I may be driven out of the market in this manner, leaving all my budding entrepreneurial ambitions regrettably unfulfilled.

The other thing of note in this is that an excess of consumptive zeal on the part of one of my rivals has the potential to put paid not only to my endeavours, but to those of other, would-be value creators, too. While it is false to say this is inherently a bad thing – since end consumption is, after all, both a child of necessity and a wellspring of motivation to action – it nevertheless gives the lie to the idea that the deliberate promotion of mass avidity somehow ‘calls forth’ investment when the truth is that such a ‘stimulus’ can all too easily co-opt the men and matériel needed to create value into activities which will extinguish it utterly instead.

By pre-empting any move to develop bigger and better means of production, it is therefore entirely possible that a blind focus on end consumption can keep us both poorer in substance and less prolific in our works than we need otherwise be; an unlooked-for penury which will perhaps lead our bewildered opinion formers and policy makers to despair at the onset of what they will term ‘hysteresis losses’, to fret about whether there are indeed any ‘gains to trade’ to be had, and then to bewail our apparently ongoing ‘productivity paradox’.

Be that as it may – and moving beyond this narrow trade in gallinaceous bipeds – it is important to recognise that the continuing overlap between our activities as buyers, sellers, spenders, savers, producers, and consumers is so pervasive that we all incessantly interact on what is effectively a single market; one on which we are constantly – if often unconsciously – discounting back from (and conversely compounding up to) the anticipated price of future goods.

This implies that the web of transactional possibilities, both actual and potential (or, if you prefer, both realised and counterfactual) which comes into being under the operation of the price mechanism is as intricately intertwined and intertemporally connected – and almost as well-explored – as the smeared-out pathway of possibilities experienced by an electron in a quantum experiment.

I say ‘almost’ for it is the honourable role of the entrepreneur to discover and then gainfully to exploit the remaining gaps in this web of implicit knowledge; to arbitrage away any informational deficiencies; and to reallocate scarce resources from lesser to more urgent wants. It is precisely for this service that he earns his profit – when that line item is properly understood in an economic, rather than in an accounting, sense – and it is precisely for this reason that profit should not be seen as some kind of zero-sum, symptom of pervasive social evil.

Here we should also be aware that, as Hayek was at pains to make clear, the economy, in all its complexity, is no unidirectional assembly line. As a result, at any given instant we might easily be contending with the ‘rivalrous’ elements of that web which involve earlier, ‘higher’ stages of production or later, ‘lower’ ones, as well as those occupying the same cross-section as do we.

Even this does not fully do the case justice, for the topology of such exchanges is in no way fixed – especially in a dynamic, growing economy. Instead it is one which is constantly evolving under the pressure of our own actions, a malleability which means that even as we move to carry out our plans, we conspire to change the very landscape in which we must try to realize their full, remunerative intent.

All of these factors mean that, if that market is deep enough to ensure the Law of One Price is observed horizontally between substitutable present goods, it also imposes the Law of One Price Ratio vertically between present and future ones, i.e., it gives rise to a single, natural rate of interest which, let us re-emphasize, our core human instincts will ensure is always positive.