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Interest rates in market anarchism

I was quite fascinated by this post by Corktageous. It contains some good rebuttals of the anarcho-socialist/mutualist philosophies. You can read it and make of it what you will, but my purpose in this post is to ponder a little bit about interest rates, a topic that was brought up in the comments after his post.

Austrian economics tells us the Fed’s (or any other central bank’s) interest rates are typically below the rate that would exist in a free market because the Fed artificially infuses credit into the economy by lowering interest rates in order to artificially encourage capital investment for political reasons (such as, in housing) or to enrich Wall Street banksters who depend upon fractional-reserve banking and inflation to stay rich. (See this writing by Mises to understand why banksters desire continual inflation.)

The Austrian model of the business cycle, which ought to be pretty much universally regarded as correct by now, explains why monetary interventionism creates the entire boom–bust cycle of economies. Artificially low interest rates (easy credit) contribute to malinvestment, which create the boom, but eventually the market corrects itself by causing these miscalculated investments to lose money and interest rates to (try to) return to normal, which appears to us as a recession but is actually the market correcting for the disturbance created by the non-market intervention. The Fed’s policy of keeping interest rates low or resuming its inflation after the recession is what either prolongs and worsens the corrective process or originates the next boom–bust cycle.

Therefore, a reasonable preliminary conclusion is that in a free society interest rates on lending would be higher, i.e., credit would be harder to come by, i.e., investments would be made more prudently and selectively. (Note that this in no way implies investment in the future would decrease; on the contrary, the free-market price system would work on money as well as it would work on consumer goods, and freely determined interest rates would allow entrepreneurs and managers to better assess present and future demand and much less malinvestment would occur, while good investments would be continually rewarded.)

The point is, one commenter made an assertion that I’ve heard before, which intrigues me: in a free market with no central bank, no fiat money, no taxes, no regulation, and no other hindrances to economic growth and personal wealth, interest rates would probably be even lower than they are now.

At first it seems like this could potentially be even worse than what the Fed inflicts upon us because even more malinvestment would occur, causing even more and/or stronger corrections (“recessions”).

The reason, it is claimed, interest rates would be lower is that people and businesses would be much, much richer because they wouldn’t be crippled by taxes and regulations, and their extra wealth combined with the vibrancy of the entire economy would promote much more lending and investing of this extra wealth into these sound companies/industries/possibilities.

That certainly seems plausible, and we mustn’t forget that the entire structure of our society, the societal and economic systems that govern our very lives and our (financial) interactions with each other, would, we hope, be drastically different than they are under Statism. This would undoubtedly engender a great shift in attitudes about all kinds of things.

It is important to keep that in mind because interest rates aren’t determined by the amount of money in the economy or even by how rich people are per se. Interest rates are the discount one receives on the fulfillment of future desires over immediate ones, or, conversely, the premium one pays for receiving a thing immediately instead of later. In other words, interest rates are the level of discount on low time-preferences or the premium for high time-preferences.

We can see that the only way for a market-wide change in interest rates to occur is if market-wide attitudes about investment in the future and consumption in the present change. So all I’m trying to say is that if you want to assert that in one situation or another, interest rates would freely be determined to be lower by myriad actors in a market economy, then you have to address their attitudes about investment in the future and consumption in the present, not just wealth or the supply of money or the demand for money. It is entirely plausible, to me, that in an anarcho-capitalist society, optimism about the future and the means to invest in it would both be much higher, in which case the interest rates for banks and investment firms to lend money would be lower. In fact, in my amateur opinion, lower rather than higher interest rates seems the most plausible in a free economy.

The difference is that this rate would be arrived at freely and cooperatively by the free and uncoerced actors in the entire economy, and not assigned by a body that has no conception of and has, in fact, eliminated all conception of a free market. To explain how this naturally-determined but still lower interest rate would not cause malinvestment and the resultant cycles of boom and bust but would, rather, result in consistent, sustained, more widely distributed, and greater growth of the economy is a task somewhat beyond my abilities as economist-by-night. The lack of literally trillions of dollars of waste by the State is probably a good beginning, middle, and end, though.

Posted in Economics, Rants