More on interest rates

On similar themes to my recent post on interest rates, Detlev Schlicter has written more on the topic. He explains that interest rates are key to co-ordinating consumption and investment:

One of the important challenges of coordination for any economy is this one: To what extent should society’s available pool of resources be employed for the satisfaction of immediate consumption needs, and to what extent can resources be used to meet consumption needs in the more distant future, that is, to what extent can they become capital goods in the meantime? Evidently, this should be determined by the public’s time preference, and this is communicated to all actors in the economy via interest rates.

The Austrian school (and others) argue that low interest rates cause artificial booms, but as Schlicter rightly reminds us, it is how interest rates relate to reality that matters:

Saving and investing are the key inter-temporal decisions in an economy, and they are being coordinated by interest rates. Low interest rates are not necessarily good or bad. What matters is that they correctly reflect the preferences of the public.

The whole article is well worth a read.

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