Appendix: Schumpeter and the Zero Rate of Interest

0:00Appendix, Schumpeter and the Zero Rate of Interest The late Professor Joseph Schumpeter pioneered a theory of interest which holds that the rate of interest will be zero in the evenly rotating economy. It should be clear why the rate of interest, the pure rate of interest in the ERE, could never be zero. It is determined by individual time preferences, which are all positive. To maintain his position, Schumpeter was forced to assert, as does Frank Knight, that capital maintains itself permanently in the ERE. If there is no problem of maintenance, then there appears to be no necessity for the payment of interest in order to maintain the Capital Structure.

0:52This view is apparently derived from the static state of J. B. Clarke and seems to follow purely by definition, since the value of capital is maintained by definition in the ERE. But this of course is no answer whatever. The important question is, how is this constancy maintained? And the only answer can be that it is maintained by the decisions of capitalists induced by a rate of interest return. If the rate of interest paid were zero, complete capital consumption would ensue. The conclusive Mises-Robbins critique of Schumpeter's theory of the zero rate of interest, which we have tried to present, has been attacked by two of Schumpeter's disciples.

1:43First, they deny that constancy of capital is assumed by definition in Schumpeter's ERE. Instead, it is deduced from the conditions of the system. What are these conditions? There is, first, the absence of uncertainty concerning the future. This indeed would seem to be the condition for any ERE. But Clements and Doody add, neither is there time preference, unless we introduce it as a special assumption, in which case it may be either positive or negative as we prefer, and there is nothing further to discuss. With such a view of time preference, there is, indeed, nothing to discuss.

2:29The whole basis for pure interest, requiring interest payments, is time preference, and If we casually assume that time preference is either non-existent or has no discernible influence, then it follows very easily that the pure rate of interest is zero. The author's proof simply consists of ignoring the powerful universal fact of time preference. As has been the case with all theorists who have attempted to deny time preference, Clements Preference and Duty hastily brush consumers' loans aside. As Frank A. Fetter pointed out years ago, only time preference can integrate interest on consumers as well as on producers' loans into a single unified explanation.

3:22Consumers' loans are clearly unrelated to productivity explanations of interest and and are obviously due to time preference.