Too little consumer spending?

A common fallacy, fostered directly by the net-income ap­proach, holds that the important category of expenditures in the production system is consumers’ spending. Many writers have gone so far as to relate business prosperity directly to consumers’ spending, and depressions of business to declines in consumers’ spending. “Business cycle” considerations will be deferred to later chapters, but it is clear that there is little or no relationship between prosperity and consumers’ spending; indeed almost the reverse is true. For business prosperity, the important considera­tion is the price spreads between the various stages—i.e., the rate of interest return earned. It is this rate of interest that induces capitalists to save and invest present goods in productive factors. The rate of interest, as we have been demonstrating, is set by the configurations of the time preferences of individuals in the society. It is not the total quantity of money spent on consump­tion that is relevant to capitalists’ returns, but the margins, the spreads, between the product prices and the sum of factor prices at the various stages—spreads which tend to be proportionately equal throughout the economy.

...says Rothbard in Man, Economy and State (chapter 6). Those (economists) who focus on "consumer spending" (or spending in general) as an indication of the health of the economy are missing the point.

Function and income of the capitalist

Thus, capitalists advance present goods to owners of factors in return for future goods; then, later, they sell the goods which have matured to become present or less distantly future goods in ex­change for present goods (money). They have advanced present goods to owners of factors and, in return, wait while these factors, which are future goods, are transformed into goods that are more nearly present than before. The capitalists’ function is thus a time function, and their income is precisely an income represent­ing the agio of present as compared to future goods. This interest income, then, is not derived from the concrete, heterogeneous capital goods, but from the generalized investment of time. It comes from a willingness to sacrifice present goods for the pur­chase of future goods (the factor services). As a result of the pur­chases, the owners of factors obtain their money in the present for a product that matures only in the future.

... says Rothbard in Man, Economy and State (chapter 6). This truth has been bent and manipulated by many. The socialist propaganda says that the capitalist is exploiting the worker, because the capitalist "only" pays his workers e.g. 95% of the sales revenue and pockets 5% himself. The fact, however, is that the capitalist is paying the worker from his own savings, so that the worker can carry out consumption immediately after work, while the capitalist has to wait until the product is sold at a later time. The "fee" for this waiting is the income of the capitalist.

Price determines costs

Factor payments are the result of sales to consumers and do not determine the latter in advance. Costs of production, then, are at the mercy of final price, and not the other way around.

... says Rothbard in Man, Economy and State (chapter 5). This important economic fact is mostly misunderstood by economists and the public in general. Most people think that prices are determined by costs of production (and I do admit, that this sounds logical). This is not true. Rothbard explains that in detail. So be aware!

Capitalists and income

If the owners of land and labor factors receive all the income (e.g., 100 ounces) when they own the product jointly, why do their owners consent to sell their services for a total of five ounces less than their “full worth”? Is this not some form of “exploitation” by the capitalists? The answer again is that the capitalists do not earn income from their possession of capital goods or because capital goods generate any sort of monetary income. The capi­talists earn income in their capacity as purchasers of future goods in exchange for supplying present goods to owners of factors. It is this time element, the result of the various individuals’ time preferences, and not the alleged independent productivity of capital goods, from which the interest rate and interest income arise.

...says Rothbard, in Man, Economy and State (chapter 5). This is a very useful quote since it addresses the whole socialist-agenda of "capitalist exploitation" of workers. Are workers getting less than they deserve if they, combined, earn less than the price paid for the products they worked on and made? No. Why not? See above quotation.