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were any other opportunities seized for the transformation of one's current
endowment into means of future consumption. The scales of values, and
the market prices, upon which the marketing plans of any one day were
based, referred exclusively to commodities endowed on that day.
As soon as multi-period plans are considered, a whole new series of possi-
bilities becomes relevant. Until now a plan has called for the sacrifice of
a quantity of one commodity by sale today, for the sake of the acquisition
by purchase on the same day of a quantity of another commodity. A multi-
period plan, however, may call for, in addition, the sacrifice of a quantity of
one commodity out of the endowment of one particular day, for the sake
of the acquisition, on some other day, of a quantity of another (or for that
matter the same) commodity. Where numerous market participants are
in touch with one another, and are aware of the multi-period plans that
each is seeking to implement, opportunities are likely to present themselves
for mutually profitable inter temporal exchanges. The terms upon which
such exchanges will be effected will depend on the degree of coordination
that the intertemporal market has secured between the different plans.
Even in a Crusoe economy, and even on the assumptions that no possi-
bilities for production exist, opportunities for intertemporal allocation
may be opened up through storage. We may assume that the storage, for
the sake of tomorrow's consumption, of a commodity acquired out of today's
endowment calls for no sacrifice other than today's consumption of the
stored commodity. (In this way we may justify the treatment of storage
in an economy without production.) A decision to store a commodity for
the future implies the acceptance of the sacrifice of current consumption
for the sake of future consumption. In a market economy several addi-
tional opportunities are likely to exist for the sacrifice of present for future
consumption. A market participant, for example, may sacrifice a com-
modity today by sale in order to acquire for tomorrow's consumption a
commodity that will appear in tomorrow's endowment of a second partici-
pant. And of course such opportunities may exist for "intertemporal
transfer between any two "days."

Clearly, the existence of such opportunities for intertemporal exchanges
arises from the differences that exist between the scales of values of the
different market participants, in respect to the order in which the pleasures
of prospective consumption on different dates are ranked today. Smith
gives a dozen oranges today to Robinson in return for the latter's promise
to return fifteen oranges on the next day. On Smith's scale the oranges of

today rank lower than the oranges of tomorrow; on Robinson's scale the
order is reversed. The divergence between the degrees of time preference
of Smith and Robinson have thus created the conditions for intertemporal
The emergence of intertemporal exchanges of this kind is accompanied
by intertemporal terms of exchange. In the single-period market discussed
in Chapter 7, there were market prices for each of the commodities ex-
changed. These prices represented the terms upon which a participant
could transform a given quantity of one commodity into a different com-
modity by exchange. In the multi-period market, quite analogously, inter-
temporal exchanges yield rates of exchange according to which given
commodities of one date can be transformed by exchange in the market into
commodities (either the same commodities or different ones) of a different
date. If Smith gives up 100 oranges today in exchange for Robinson's
promise to return 110 oranges a year hence, this 10% "orange-rate of inter-
est" represents the relevant terms of intertemporal exchange. In a mone-
tary economy, of course, intertemporal exchanges need not be on a barter
basis. Instead of Smith obtaining a promise of oranges next year in direct
exchange for oranges today, he may accept a promise of money for next year
and then buy oranges next year when the promise is redeemed. (Or again,
he may accept money now from Robinson for his sacrificed oranges, and
then, in a separate transaction, lend this money for a year to Jones, and buy
oranges next year when the loan is repaid.) Under these conditions, terms
of intertemporal exchange will be represented most clearly by the money
rate of interest, taken in conjunction with the current prices of the various
commodities, and with their expected prices for the various relevant
future dates.
If a market where intertemporal exchanges are taking place is to be
in equilibrium, the multi-period plans of all the participants must "fit in"
with one another. The terms of intertemporal exchange must be such
that for each planned sacrifice of a quantity of commodity of date a, for the
acquisition of a commodity of date b, some other participant should have
been induced to plan the same exchange in reverse. If, as a result of
imperfect knowledge of each other's desires, rates of intertemporal exchange
are any different from the equilibrium pattern, some participants coming
to market, at the end of a trading day, will have been disappointed in
their attempts to accomplish intertemporal exchanges; and they will, in
making plans for entering into such exchanges on the following day, revise
their estimates of the market intertemporal rates of exchange. For equi-
librium to exist in the intertemporal market, it is clear, a very precise rela-
tionship will be required between (a) the current price of each commodity,
(b) the prices that each of the various participants expect to prevail for the

various commodities on each of the future dates, and (c) the various money
rates of interest prevailing on loans of various maturities.
Of course, just as in the single period case considered in Chapter 7, an
intertemporal market may be expected, in general, to be in disequilibrium.
Changes in time preference from one day to the next will alter the plans
being made and will (on top of all the other changes in the data that tend
to keep a market in disequilibrium) complicate the market forces of adjust-
ment that are set into motion by the disequilibrium existing in the market
on any one trading day. The intertemporal market, moreover, is subject
to complications that are of especial relevance to multi-period decisions.
Such decisions, we have seen, depend in an extremely sensitive way upon
the expectations that participants hold concerning the prices of the various
commodities on different future dates. (Intertemporal exchanges may
clearly arise merely as a consequence of divergent price expectations on the
part of various market participants.) The uncertainty and the risk neces-
sarily attached to expectations are likely to color the plans being made on
any one day, and, in particular, the revisions in plans that will be made as
the result of previously disappointed plans. Within the framework of
this book, all that can be done is merely to point to these complications
without any thorough further examination of them.

The possibilities of intertemporal exchanges outlined thus far indicate
the role that speculation can play in a pure exchange economy. Suppose
there is reason to believe that during some particular future time period
the endowments of market participants will contain relatively few oranges
(as compared with the endowments of other periods of time). Then many
participants would gladly sacrifice the consumption of some oranges during
other periods for the sake of oranges during the scarce period. Complete
adjustment by the market to achieve this particular allocation of oranges
over time would call for the storage of oranges from other periods up to
the scarce period. A market that has achieved equilibrium with respect
to these expectations and tastes would have adjusted the current price of
oranges, the money rate of interest, and the expected future prices of
oranges into a very particular pattern. This particular pattern would be
such that exactly the "right" quantity of oranges is purchased in the market
by speculators during each period to be held in storage for the future scarce
period. With this particular pattern prevailing, no two market partici-
pants can discover any alteration in their multi-period plans that might
leave them both in a preferred position.
Where an intertemporal market has not achieved equilibrium with
respect to current expectations and tastes (for consumption in the various

periods), "arbitrage" opportunities exist which the more alert potential
speculators may exploit. Where for example a particular market partici-
pant has discovered, before the other participants have become alerted to
this possibility, the likelihood of a future scarcity of oranges, he will be
able to earn speculative profits by exploiting his superior knowledge of
future conditions. He will be able to buy oranges today at cheap prices
(or, alternatively to buy cheaply the promise of oranges to be delivered in
the future) and to sell them for high prices in the future scarce period. By
exploiting his superior knowledge in this way he is at the same time re-
allocating oranges over time, from consumption during periods where the
marginal significance of an orange is low, to consumption during a period
where the marginal significance of an orange (as ranked by consumers today)
is higher.
As market participants compete with each other for these speculative
profits, the market is brought closer toward equilibrium and further oppor-
tunities for such profits become more and more difficult to obtain. In this
way entrepreneurial activity succeeds in bringing coordination into the
mass of individual intertemporal plans, incorporating their decisions to
consume, save, lend, and borrow. All these market repercussions would
take place, as we have seen, even in an economy where production is impos-
sible. Where opportunities for production do exist (as they did in the cases
studied in Chapters 10 and 11), these kinds of intertemporal exchange (and
the resulting opportunities for speculative activity) are no less relevant. In
a production economy, however, the necessity and the opportunities also
exist to make additional intertemporal decisions; we now turn to these.

In an economy where production is possible, market participants find
themselves endowed with productive resources. It is possible for the entre-
preneur to buy resources, allow them to combine and yield output, and
then to sell the output in the product market. A fundamental feature of
any decision to produce in the real world is that any decision to produce
represents at the same time a decision to effect an intertemporal transfer of
assets. Since every production process takes time, it follows that every
decision to produce is a decision to sacrifice inputs now for the sake of
output later. This aspect of production was not stressed in the treatment
of production in Chapters 8, 9, and later chapters. In these chapters, where
attention was focused on other aspects of production, a production decision
was treated as if any difference in date between the application of resources
and the yield of products could be ignored as of no consequence. We must
now outline, or at least point to, the major implications for market theory
that arise from taking notice of such time differences. These implications,

taken in conjunction with the widened possibilities that exist within a
production economy for those intertemporal decisions that we have already
noticed for the pure exchange economy (with their application being
widened now to cover also decisions concerning resources as well as con-
sumer goods), provide the temporal framework within which a market
system operates.
In the multi-period production economy, in fact, each decision”whether
concerning the sale or purchase of a resource, the production of consumer
products, or the sale or purchase of consumer products”has a time dimen-
sion. Each resource owner must make an allocation over time with respect
to the sale of the services of his resource (insofar, that is, as he is able to
store his resource endowment over time). Every utilization of a resource
for a particular process of production involves an opportunity cost that
reflects, not only the potential contribution to other processes of production
that this resource might make now, but also any such contribution which it
might make at other times. (Thus, even the employment of a completely
specific resource may involve an opportunity cost insofar as its use today
precludes its use in the same employment in the future.) Every process
of production, as we have seen, reflects an intertemporal transfer, sacrificing
current inputs in favor of future output. Every decision to buy or to sell
consumer products involves, of course, the very same kinds of intertemporal
decisions we considered in the preceding sections.
Now, the time dimension attached to the decisions concerning the sale
or purchase of resources or of products introduces no essential complications
beyond the analysis referred to in the preceding sections. For equilibrium
to prevail there must be certain relationships between the current prices
and the expected future prices of the respective items, and, of course, the
relevant rates of interest. These will spell out the terms upon which present
resources or products can be directly transferred into specified future ones.
The agitation of the market will be continually adjusting these intertemporal
terms of exchange so long as they perversely encourage unrealizable plans
on the part of market participants. But the inherence in every production
decision of a temporal aspect does introduce complications not previously
These complications have to do principally with the necessity faced
by each would-be producer to choose between production processes absorb-
ing different lengths of time. This, in turn, is closely related to the problem
of which particular capital goods will be employed for the production of
given consumer goods. Let us first consider the production of a given con-
sumer good, say a chair, by a would-be producer who finds only naturally en-
dowed resources available in the market. Any of several methods of
production might be employed. Each of them requires the use of pro-
ductive resources; in each of them the producer finds himself, after the

elapse of some time interval shorter than the length of the entire process,
in command of intermediate goods. If, for example, he attempts to fashion
a seat, with his bare hands, out of a tree, an uncompleted process of produc-
tion will have yielded perhaps the pieces of wood to be somehow contrived
later on into the chair. If, on the other hand, he first contrives tools to
construct the chair with, an uncompleted process of production might yield
only a hammer or a saw. In both cases the intermediate products are steps
toward the final product. In selecting the particular method of production
to adopt, a would-be producer is at the same time selecting the particular
form the intermediate goods should take.

Observing a cross section of a particular process of production prior to
its completion, then, one encounters intermediate products. Such products
constitute capital goods. Looking backward, one realizes that the produc-
tion of such capital goods has already absorbed time. In fact, it may be
possible to know of some alternative process of production that might have
yielded already, in the time already absorbed, at least some quantity of the
final product. (Thus, during the time in which the carpenter's tools have
been constructed, it might have been possible to fashion one crude chair
without tools.) Looking ahead, one realizes that the past production of
these capital goods will save future time in the attainment of thefinalout-
put aimed at. Assuming that the producer selected wisely the capital good
that he has produced, it follows that he is temporally closer to the attainment
of his own output goal than he would have been otherwise. In fact, of
course, it was precisely this prospect”of being closer to the final goal”that
justified the intertemporal transfer of assets represented by the production
of the intermediate product. In producing the intermediate products, the
producer sacrificed the inputs of an earlier date (inputs that he might have
been able to utilize for earlier consumption) for the sake of the intermediate
product of today. He did so only because of the prospect of the superior
position he is now placed in as a prospective producer, by virtue of his
command of the intermediate product.
Now, in a market economy, it is not necessary for the producer of a
final consumer product to have himself produced the capital goods he uses
in his production process. He may buy them from other producers for
definite prices. These prices, like all others in the market, will reflect on
the one hand their usefulness to users of the capital goods (as expressed in
the demand side of the market), and on the other hand will reflect (in the
conditions of supply) the sums required by the producers of the capital goods
to have made it worth their while to devote their resources to the production
of these goods rather than others. Demand conditions for capital goods

will thus reflect the relatively greater nearness in time to the final production
goal, which command of these goods confers. Supply conditions for capital
goods will reflect in turn, among other costs of production, the sacrifice of
time that went into their production. Whatever the money rate of interest
that is currently prevailing, and which helps determine the terms of inter-
temporal exchange, it will be reflected in the price of the capital good, as
compared with the prices of the inputs used in its production. Ultimately,
of course, such capital goods will be produced only in the quantities that
will be demanded by the producers of final products; that is, only in the
quantities justified by the superior achievements of producers using these
goods and by the prices of the final products themselves.
Where, for the sake of simplicity, two different capital goods can be
produced out of the same inputs, but require respectively different periods
of time for their production, definite market forces will influence the deci-
sion as to which of the two should be produced. The more time consuming
of the two goods will involve the greater sacrifice in terms of postponement.
The producer of the capital goods could clearly benefit from his efforts
sooner by producing the other good. Or, if this producer has borrowed
the required inputs (or purchased them with borrowed money), and pro-
duces the more time consuming of the two capital goods, he will have to
compensate the lenders for the additional postponement that they accept,
by paying interest for the longer period. This additional sacrifice clearly
will be justified only by the correspondingly higher price obtainable for
this capital good in the market. And such a higher price will clearly only
be obtainable as a result of the correspondingly superior productivity of the
more time-consuming capital good.
If the relative superiority in production of this capital good (whose
production absorbed more time) is very outstanding, it may conceivably
offer an opportunity for intertemporal transfer of assets that is superior to
any obtainable elsewhere in the market. In this case the inputs originally
invested in the capital good have yielded a greater return in value of final
product than could have been obtained by investing the value of the inputs
elsewhere over the same period. The existence of such an opportunity
clearly will result in market agitation that will operate toward lowering the
price of the final product, and raising the prices of the inputs and of the
money rate of interest, until the opportunity for intertemporal transfer of
assets is no more profitable by this means than by other means.
The market process tends to determine in this way, not only the rates
of interest, the prices and quantities of resources used, and the prices and
quantities of products produced, but also the time structure of production.
The time structure of production refers to the lengths of the processes of
production that are necessary to make up final products. A cross section
of a production economy at any one time reveals a mass of capital goods,

each of them an intermediate product leading toward some final output.
The make-up of this mass of capital goods, the degree to which they repre-
sent greater or smaller investments of past time, is a reflection of the earlier
operation of the market process. The greater the degree that market partici-
pants have in the past been prepared to sacrifice earlier for later consump-
tion, the "deeper" will be the time structure of the existing capital stock oí
the economy. The continued operation of the market process will now
determine (a) how this existing stock of capital goods will be used for further
production (that is, for the production of what products each of the capital
goods will be employed), (b) whether the stock of capital goods will be added
to, merely replaced as they wear away, or permitted to depreciate without
replacement”and (simultaneously with the determination of the quantity,
if any, of new capital goods to be produced), (c) the particular capital goods
to be produced and especially the time structure of these goods (that is, the
lengths of time to be taken for these goods to be produced, and the planned
lengths of time for which these goods will be used severally in further
processes of production in the future). The analysis of the way the market
process determines these matters comprises the body of the theory of capital,
a branch of price theory where the temporal aspects of the market are of
the essence.
Suggested Readings
Mises, L. v., Human Action, Yale University Press, New Haven, Connecticut, 1949,
Chs. 18, 19.
Stackelberg, H. v., The Theory of the Market Economy, Oxford University Press,
New York, 1952, Bk. 2-Ch. 6, Bk. 3-Ch. 3, Bk. 5-Ch. 3.
Malanos, G., Intermediate Economic Theory, ]. B. Lippincott Co., Philadelphia,
1962, Chs. 4, 12, 13, 14.
Conard, J. W., An Introduction to the Theory of Interest, University of California
Press, Berkeley, California, 1959. Ch. 8.
Henderson J. M., and Quandt, R. E., Microeconomic Theory, McGraw-Hill Book
Co., Inc., New York, 1958, Ch. 8.

Adaptability, 2O3ra Constant returns to scale, 164
Allen, R. G. D., l69n Consumers, 15-16, 238-239
Allocation of resources, 297-310 Consumer equilibrium, 65-79
Alternative cost doctrine (see Opportu- income allocation, 63-79
nity cost) Coordination, 33-44, 297-309
Arbitrage, 114, 120, 252, 316 Cost, marginal, 199
Arc elasticity, 92n per unit, 198
Autarky, 2 social, 186
Costs, and decisions, 190-191
"Backward-sloping" supply curve, 256n fixed, l92n, 2O3n
Bain, J. S., 285n implicit, l9On
Baumol, W. J., 310 long-run, 202-206
Böhm-Bawerk, E. von, 84, l l n , 135 of production, 145, 183-209
Buyers' surplus, 110, 293 prospective and retrospective, 189-192
short-run, 198-202
Capital, 150, 317-320 variable, l92n, 200, 2O3n
Cross elasticity, 99-100, 275n
Capital goods, 192-198, 317-320
Cardinal utility, 57-59, 66n
Carlson, S., 182 Decisions, 5, 46, 144-146
Cartels, 268-270 Decreasing returns to scale, 165
Centrally controlled economy, 2 Demand, 45, 63
Chamberlin, E. H., 209 cross elasticity of, 99-100
elasticity, 89-93
Choice, 5, 46-48, 143-145
Collusion, 268-270 curve, for a factor, l79n
Competition, 106-107, 129, 265-296 facing an entrepreneur, 94-96, 199,
200, 2l5rc, 2l9n
free, 29ln
individual, 79-82
monopolistic, 285n
market, 87-89, 137
potential, 287
and revenue, 96-99
pure and perfect, 289-291
Diminishing marginal utility, 49-51, 65,
Complementary goods, 52, 75, 100, 102,
150-151 188
Diminishing returns, law of, 166
Conard, J. W., 320
Disequilibrium, 23-24, 112-115, 122-128,
Conditions for exchange, 60-61
222-225, 231-233, 243, 250-252
Consistency, 35

Distribution, 38ra General Equilibrium, 26, 29
Divisibility, of factors, output, I55w, General Market Process, 233-264
195-197 Goods of lower order, 20
Division of labor, 36, 147 Goods of higher order, 20
Duopoly, 270
Hague, W. C , 182
Economic facts, 9 Hayek, F. A., 12, 32, 296, 310
Henderson, J. M., 320
problem, 33-35
Hicks, J. R., 84
theory, 7-12
Horizontal market relationships, 20-22,
and reality, 7-10

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