Classical System and Foundations of Interest Theory

Flashcards on Classical Economics and Interest Theory

David Ricardo

Framed the distribution problem as how the product of an economy (Q) is divided among wages (labor), rent (land), and interest (capital).

Ricardo's Classical Theory

Posits subsistence wages, rent as a premium for fertile land, and interest as the residual.

Austrian Economists

Carl Menger, Eugen von Böhm-Bawerk, and Friedrich von Wieser; focused on imputing value to resources more generally.

Imputation

The process of assigning value to individual production inputs based on their contribution to the final output.

Euler's Theorem

A mathematical tool used to derive factor payments in a production function with constant returns to scale.

Marginal Productivity Theory

The theory that factor payments (wages, interest) are determined by the marginal product of each factor (labor, capital).

Growth Accounting

A method to decompose total output growth into the contributions of labor and capital inputs.

Böhm-Bawerk's Explanation of Interest

Interest arises from (1) time preference and (2) roundabout production.

Time Preference

The idea that people prefer consumption today over consumption tomorrow.

Roundabout Production

The use of capital-intensive, time-consuming production methods that yield higher productivity.

Irving Fisher

Developed a graphical model of the interest rate as the intersection of supply and demand for loanable funds; introduced the Fisher Equation.

Fisher Equation

Relates nominal interest rates, real interest rates, and inflation expectations.

Knut Wicksell

Argued that the demand for loanable funds arises from the marginal product of capital.

Neoclassical Economics Critics

German Historical School, institutionalists (like Thorstein Veblen), and the Austrian School questioned the assumptions and mathematical formalism of neoclassical economics.