13. A Psychological and monetary criticism of Böhm-Bawerk⁴⁰

Not consuming today is equivalent to consuming tomorrow; a statement that I have made clear. This postponement is sometimes inevitable because present assets do not allow for present consumption. This consumption can also be of capital goods, in which case its acquisition is called investment and its consumption depreciation. Other times it is a simple business of a person being exhausted today and preferring to keep his belongings close, transferring consumption to tomorrow. Thus, the cases multiply.

And if today’s savings leads to greater future consumption due to interest, this is even better, but as stated, this does not explain the origin of interest or the genesis of savings. This is Bernácer’s basic criticism of Böhm-Bawerk, which is also psychological. And I have others:

Let’s focus on interest. Savings S is formed with an interest rate over a period of time t. When period t has ended, S has converted into S’, where S’ > S. This savings S’ permits greater consumption than what was renounced. This greater consumption is interest. Total interest is compensation, according to Böhm-Bawerk, for this renunciation of consumption.

S (l + i)^t = S’ S renounced consumption or savings

S’ > S S’ greatest possible consumption

Since days of yore, possibly since the Babylonians, capitalisation and discount systems can be found using certain operational rules. But none, not even the most perfect, makes it possible to calculate or measure interest that takes place only in subjects’ minds. If interest is subjective, how can be it calculated?

However, given that interest is calculated and other values are also calculated using interest like the final total and current values, it is clear this calculation has been possible owing to the existence of a numerical reality.

Interest is given as a datum from the outside world, outside of the subjects’ minds. It is a number and an economic category of which the market loquaciously talks.

After calculating interest using market data (everything is ex-post in economics), the number is inserted into the formula for the amount saved, which is another reality, a certainty. Then using these two factual numbers, the other is calculated, which is capitalised savings S’, which lets consumers acquire consumer goods for this value S’, which is in turn is another number, a market figure. All are realities that come from outside the mind into the mind, but nobody denies the existence of greater utilities derived from greater consumption⁴¹.

How are these calculations performed? Let’s use a simple example. If a person has placed (lent) his savings of 10,000 euros and it has given him income R of 1000 euros, what is the profit or percentage income? 10%, the interest. Income assets, a bad choice of name by Bernácer, given that they are not assets, but are our actual, financial, secondary assets, are bought and sold with system savings, resulting in a price V⁴².

Ingenuously, Böhm-Bawerk complicates things and tries to calculate the value of V by financially updating incomes. Updating that involves the prior existence of interest, which to make matters worse, is subjective. Thus, Bernácer said ‘…and who told him to discount something, for which the first thing needed is to have an interest rate, which we are searching for a way to establish?’.

The solution could not be easier for Bernácer. Ask the market to continuously and loudly publish the price or value of securities. The market informs us of this for free, as well as the value of V. The value of V is the exchange of securities for savings.

With V known, as well as the income generated by each asset R, the profit percentage can be calculated for savings invested in these actual, financial assets. This percentage profitability is the interest rate.

Böhm-Bawerk’s calculation is: Data: i
                                          Unknown: V
     V unknown = R [(1 + l/(l + i) + l/(1 + i )² + … + l/(1 + i )^t] = R 1/ i

Bernácer’s calculation is: Data = V
                                 Unknown = i

                                 i = unknown = R/V

Note: a_ni = [(1 + 1/(1 + i) + 1/(1 + i)² + … + 1 /(1 + i)^t] if the income is undefined lim
         _t→∞a_ti: 1/i.

Note: here R is not production income, is not Y.

Bernácer’s statement does not rest solely on scientific theory, but on the operative reality that economic agents continually execute. This still does not explain interest and Bernácer does not even attempt to analyse it. Interest is born because system savings becomes scarce. And it becomes scarce because there is no need in the system, but there is a need in the capital market (factor of production capital)⁴³.

I repeat that interest is not only the percent profit of the placement of savings. The most important thing here is the nature of the placement or purchase made with this savings. The things that are bought with this savings are actual, financial assets from our financial market. These assets, as seen already and that will appear again, do not represent current production. They are dead wealth at the most. The purchase of these assets with savings is not investment at all, but rather the outflow of income from the ordinary market to the financial market. It is almost the opposite of investment, given that the natural destination of savings is investment or buying of capital. However, something else has been bought here: financial market assets. The percent profit from savings placed on the financial market is called interest. And the percent profit of savings placed into capital goods is called the marginal profitability of capital goods. It is somewhat similar to what Keynes (maybe inspired by Irving Fisher) called marginal efficiency of capital and distantly similar to Wicksell’s real interest. Marginal profitability of capital and the interest rate are not only different, but opposite.

Another viewpoint separates Bernácer and Böhm-Bawerk. From a macroeconomic perspective, things will be different. In summary, interest lets savings be separated to form the accrual of capital. In an economy close to full employment (serious, scientific prejudice from 19^th-century economics), if a person wanted to invest, savings had to be obtained and this could only be done with the allure of interest.

The History and Critique of Theories on Capital Interest (1884) and the Positive Theory on Capital (1889, Innsbruck) are books on marginalism that establish a bridge over macroeconomic ideologies. But they are rigid ideologies with respect to full employment. Only 27 years later, Bernácer did not even believe in full employment or savings recycled in the production system. He claimed that rents from the land are the historic origins of interest.

Bernácer was surprised, not just at the coexistence of wealth and misery and subsequent social criticism, but at something more intimately connected to the economic system. He was perplexed by the coexistence of the economic system’s enormous capacity to generate wealth (as a physics teacher, he knew how to appreciate this) and misery. He was also interested as a physicist in the waves of prosperity followed by waves of depression. And as a human being and scientist, he was surprised that the manifestations of destruction were the same as those held by production resources. Wars occupy mankind in their bellicose zeal, more than the tasks of peace.

For Bernácer, both in 1916 and in 1955, the economy is normally found in unemployment. If resources are unemployed, no allure is needed to rescue them and put them into activity, into investment according to Böhm-Bawerk.

But don’t be fooled by words. The thing that is idle is money and nothing else. The production system can be put into operation with money. If money is inactive, interest will do nothing as a prize to rescue it from where it is. However, the stimulus of future profit is required, a category that is different than interest. This is Bernácer’s central macroeconomic criticism of the Austrian school that closely resembles the Keynesian school.

Money is an economy of unemployment, where it is idle and production factors are also idle. Investment is possible without the existence of interest. Let’s look at this statement from another point of view, since it is much more complex than it seems. It has taken me a lot of work and I am not sure if I have been successful. If money is unoccupied, then where is it? I want to speak of savings for a moment instead of money. And if savings is unoccupied and is therefore relatively abundant, then interest should be low. However, it is not low, but high. The matter becomes enormously complex when pointing out that the phenomenon has double causes. Let’s see why:

Interest is high and it is high because savings, which is paradoxically abundant, has become relatively scarce. It may be high because there may be great demand for it, which I don’t believe, because one of the characteristics of unemployment is the lack of demand for savings. Maybe the demand for savings may slow down because interest is high, although this statement poorly captures the problem. The first thing is to find out why interest rates are high. Interest is high because savings are abundant, in quantitative terms, and have become quantitatively and relatively scarce. Saving is high in times of unemployment because it is self-exiled on the financial market. The starting point, the original homeland, is the ordinary market where investment takes place. Why isn’t it there then on the ordinary market? It becomes scarce in this market and abundant in the financial market. The latter market is where interest is produced.

Money’s brothers are production and income and the twin brother of savings is investment. But this ungrateful brother has left home when there was still unsold production and potential production resources from fixed and working capital that had not been incorporated into production. Since part of savings is now in another market, the paradox arises that there are unoccupied production resources when there is an abundance of savings.

Interest was possible due to non-capitalised savings, which Bernácer called maximum disposable funds or authentic disposable funds D. This same interest is the allure that makes it possible that savings is not invested and that the scarce demand for capital goods, potential demand, is discouraged from production activity (see section 6 of the introduction of the book, and section 1.2 of Part 1, How Money Works).

As you can see, the Austrian’s theory has been attacked from all sides. Almost nothing useful survives except the contention that one of the multiple causes of the formation of savings is interest.

14. Turgot: a discovery in the history of economic thought related to interest⁴⁴

bernácer’s admiration for Anne Robert Jacques Turgot is seen throughout his work. We will never know if the French economist was the beginning of Bernacerian theory or the middle. In the world of macroeconomics, Turgot’s work on interest is a masterly piece, providing so much evidence that the rest of the theory can be reconstructed by simple logic. This is perhaps the reason why we can never know the total influence that Bernácer had on Keynes for certain.

The origin of interest is found in Turgot’s work. Almost one hundred years before Böhm-Bawerk, this great French economist could dismantle almost his entire theory on interest. The drawback Turgot had was the time in which he lived, or rather the physiocratic school, which imprisoned him in their analytic schemes. Nevertheless, Turgot frequently detoured intelligently from the physiocratic school. Another disadvantage that is obvious is that it would still be another century and a half before a theory on money appeared, the money market specifically, at the hands of Bernácer and Keynes.

He did have one large advantage that he didn’t know how to best benefit from. He was the economist who explained the law on diminishing returns (Réflexions sur la Formation et Distribution des Richesses, 1766). While his analysis was good, he could have (a forced supposition) compared monetary interest to percentage yields on production assets instead of those acquired with money. This is the facet that Bernácer glimpsed, who quickly compared Turgot’s inheritance with his conception of money.

Turgot postulated on the freedom of lending with interest (words Bernácer quoted in History of Economic Doctrines). The reason is that whoever lends money could acquire lands, which generate rent, on the assumption that if lands are not acquired and money is still lent, as a minimum income should be received. This is the origin of interest. Bernácer said that Turgot appears here as a predecessor to interest and productivism. The latter is a theory already defeated by Böhm-Bawerk and the first is linked directly to Keynes’ liquidity preference and Bernácer’s disposable funds.

Inspired by Turgot’s body of work, Bernácer collected Calvin’s ideas that said: ‘Money does not give birth to money: but with money farmlands are bought, which produce more than it costs to work them, and leave the owner with excess income after deducting current expenses. With money, one buys things that produce incomes. Now: something with which one can buy objects that produce income on their own, can’t they be considered as producing income?⁴⁵’.

The matter is more complex and transferred to David Ricardo. To Bernácer, rent from the land is natural income. He referred to the comparison between land of better and worse quality. Speculative income is the marginal or percentage result generated between the free supply and demand of land. Supply that is from the owners and demand from those who put it into working conditions. This statement and difference between actual and speculative income goes back to Society and Happiness (1916), which also provided a modern and detailed explanation of production elements and what wealth is.

As this is known, the analogy is mandatory. One thing will be profitability from production and another thing is speculation, which is done with funds that theoretically finance these elements. The same that happened with land, but transferred to capital equipment.

I do not suggest throwing light on and differentiating the thought of David Ricardo and earlier Turgot. That is not my task, but rather what Bernácer thought. Yes, he is confrontational about what is actually productive and, in the long run, productive less than proportionally (law of diminishing returns) with the profitability of the funds that let them be financed. These funds, and this is Bernácer’s view, are savings. What is important is to know that these funds are not enough. They are insufficient because they are found in financial speculation. They are in the financial market and not on the ordinary market⁴⁶.

Readers may wonder why after insisting so much that savings is insufficient (because part is in another market), I have still not explained its scarcity. The reason is found in the fact that what enters the financial market from your right pocket may exit from the left pocket to be spent on consumer goods or capitalisation by speculators. It can only be explained by the net variations determined by the relationship between what enters and leaves the financial market to and from the ordinary market.

Turgot praised savings, because it made interest drop. However, he did not see Bernácer’s financial market or Keynes’ speculative market. Physiocrats assumed that only hoarding and accrual in kind would remove resources from the market, but if this savings did not occupy itself in this toil, the potential problem would disappear. Thus, Bernácer pointed out: ‘Turgot and his opponents disputed the fact that returning to circulation involved a return to the product market, since savings could take part in financial or speculative operations. Turgot was not unaware of this, but he believed that the time was negligible during which loans and land were exchanged and savings occupied and, therefore, the sums occupied in these exchanges⁴⁷.’

And the case arises in which this innocent occupation of savings, financial and speculative, is where Bernácer’s attention gravitates⁴⁸.

15. Interest revisited

interest for Bernácer is financial interest. There is no other. Different terms may resemble it, but they are other economic categories, not interest.

The part of savings that is not capitalised is maintained in disposable funds D, the rest S_k is savings that is capitalised and, when invested, stops being available. Disposable funds leave the ordinary market and go to the financial market, where they acquire securities, to name but one example. Thus, they stop being totally available and are partially available. Don’t think that ‘partially’ is an ambiguous term. There is another bigger and useless one called liquidity. I will speak of its uselessness later. Securities can be sold quickly and transformed into money, returning to total disposability. Half disposable is a scientific joke. Money is available or it isn’t available.

It is not available because it is placed in the financial market to acquire securities V. The funds invested in V yield a chain of yields R. Updating this chain of yields: V = a_ni R and in an undefined series of time towards infinity V = 1/i R. However, V is a security provided by the market and resulting from the free play of supply and demand. This supply and demand for securities is nothing but the reciprocal one for the supply and demand of disposable funds. Whoever has securities and sells them is demanding disposable funds and whoever has disposable funds supplies them to demand securities. The mechanics is the same as merchandise supply and demand.

Once V and R are both known, then interest is found by: i = R/V. Expressed commonly, financial interest answers the question: How much money will you make from the money placed in these securities? This is our interest. (Note: R is not production income.)

The enemy of investment is this interest, due to the simple reason that it is possible to obtain profits by placing liquid capitals (disposable funds) into speculative activities instead of productive ones. This is the same as going to a bank to demand money to invest (others’ savings) and asking about market interest rates. If they are high, higher than the yield of the investment, you leave the money in the bank or you speculate with it.

This interest is the enemy of the production system in general. Just remember that the disposable funds used to produce interest represent a purchasing mass, a monetary mass to be blunter, that has left the market. The production system thus becomes less profitable monetarily and thus also reduces its fighting capacity against speculative profitability.

Deep down, it is only a causation that is negatively strengthened in two ways. One, disposable funds lubricate the financial market and make security prices rise. Financial investors find that their interest has gone up or that speculative securities have increased. Both results are interesting to them. Disposable funds decrease the profitability of the ordinary market by using income spawned in this market that does not return to it. As seen, the effect is co-causal and negatively strengthened in two ways.

15.1. The profitability of capital

A series of terminologies that are imprecise and become conceptual are clarified by Bernácer. I am not referring to Böhm-Bawerk, but to productivism theory. Bernácer’s words reach across time to modern macroeconomics.

The last unit of capital employed is what determines the demand for capital. Or using the terms of productivism: The productivity of capital or the production of the last unit of capital applied is what determines the percent interest earned by the capital. Bernácer felt that this reasoning had to be turned around. Thus, he said: ‘It is not the productivity of capital, or even the productivity of the last portion of capital applied, that determines the percent interest earned by the capital, but rather the current interest that limits the capitals that can be applied with payment.

In this statement, written in the beginning of the book The Interest of Capital, page 18, when he still hadn’t explained the origin of interest, he took for granted that one thing is the profitability of capital and another thing is interest. He also wanted to clarify a confusing term –capital– that is sometimes used as synonymous with money or money-savings and other times as factors of production. Not only are they not equal, they are opposite, although complementary. Savings is what lets capital be financed. I stubbornly continue to be faithful to my style of reasoning that says that whoever supplies one thing, demands another.

In the ordinary market, whoever demands capital goods supplies savings in exchange and whoever supplies capital goods is demanding savings. This reasoning is basic for explaining the shortage of capital in productivism theories. In said book, Bernácer started by saying ‘With this, we return to classical theory, which postulates the scarcity of capital as the basic fact over which the existence of interest must necessarily be supported’. It is a demonstrable fact that capital is necessarily advantageous and useful. In reality, the sun and air are also advantageous and useful natural capitals. The price does not rest in its utility but rather, the price is basically a function of scarcity. Capital is scarce. Why is it scarce? They say that to form it, a series of obstacles must be overcome. Abstinence, pain, waiting, the sacrifice of renouncing consumption, etc. Bernácer said that none of that is true and added that they spoke poorly, imprecisely.

There is surplus potential capital in the system. It needs to be constructed and put into operation and to do so, money is needed or, perhaps more precisely, savings or money-savings. Thus, capital is not scarce but the savings that form it.

Bernácer said that the origin of discord ‘…rests in the fact that one speaks of capital, but really referring to something that is not capital…’ ‘They confuse capital and money.’

This confusion, which I believe was clarified later by economic science, is spread throughout economic literature. They say that capital is the thing that produces and that capital is the thing that earns. The first is the one who makes a mistake. A machine is productive and a plough is also productive, but a public debt security also is productive. Turgot’s student quickly realised his error. It has been known since before the days of David Ricardo that capitals are the factors of production manufactured by man. Capital is formed and acquired with savings. With savings, assets are also acquired that generate speculative income.

Stated more clearly, savings (which is not capital) can be distributed into two portions: one that finances capital and the other that acquires assets that generate free income. They are two different realities that involve two complementary economic operations. Savings that finances savings is an operation called investment. Savings that finances the acquisition of securities is an operation called speculation or financial investment, although I don’t like the term investment much here. Both transactions generate profitability, one productive and the other financial. The second is interest, the enemy of capital profitability.

I have gone off a bit on a tangent before explaining the profitability of capital. However, it was necessary to calibrate the original concept of capital⁴⁹.

Bernácer did not explain the profitability of capital with great exactitude. He preferred to speak of the profitability of production in general. Perhaps, he thought it was forced and unrealistic to think that the only thing important to entrepreneurs is fixed capital. Many more factors intervene, everything in fact, but not all of them are financed with savings. Working capital is also essential. The most similar to capital profitability is the percentage between placed savings and the yields of investments at a given time. It is production profitability of investments.

This profitability is conditioned by the circumstance of prices and costs on the one hand and, on the other, market interest. Let’s clarify these conditioning factors. Instead of speaking of awaited returns, he spoke of ‘…marginal investment earnings of industry at a given time…’ A Free Market Economy, page 171, 1955). We can logically understand that these are profits that are produced. Moreover, he analysed what determined returns instead of using this term as a piece of data. Returns are determined by the circumstance of prices and costs. The phrase that explained it was ‘…and it is conditioned by the circumstantial position of prices and costs, defining costs as the weighted prices of the elements that enter into product manufacturing’ (A Free Market Economy, page 171).

Interest, which is only financial, sets the barrier for the entrance of financing of capital goods.

Bernácer was extremely innovative in his analysis. He distinguished investment that will be made with investment that is already made. Before, it is interesting to know the discourse he made on capital goods. These are acquired after first being manufactured by whoever is interested in their production. Capital undergoes depreciation and its monetary compensation: amortisation, which is a cost. But the market gives it a very different value, frequently higher than the cost value. Frequently, the sales cost of production capital is higher than in the past, although its cost is compensated. New capital has a supply price on the market and demand will acquire it according to the volume of sales available for these ends. Capital always has a specific form in production; it is a loom, a machine, etc. New capital is already created and old capital is in the production process. How is the value of these capitals measured? New ones by the market price. New capitals mean they will be bought or have already been bought and will now be used in production. The already-created capitals, or old production, are when they have stopped creating new capitals of the same type. The only way to estimate the value is by the monetary value of their production.

How is this price determined? Like all financial updating operations: by their profitability and the type of capitalisation. If this capital equipment acquired is K and the awaited profits are B, the value of K will be given by K = a_ni B⁵⁰. I need not repeat that the updating rate is 1/i because this operation is the typical perpetual income formula for financial market assets. In production, specifically for capital equipment, nothing is forever. Its life is n and the profits B are obtained during their useful life, n.

Entrepreneurs who have already acquired this capital equipment K keep it occupied and have no interest in selling it, which is how their capital goods are given a price. Bernácer said ‘…with respect to completed capital applications, due to the fact that they shouldn’t be removed but are instead used up during production, there is no other solution than adapting their sales value to their profitability, with respect to how the free capitals are normally produced that are either dedicated to industry at that time or not…’

One shouldn’t speak of capital abstractly, not even for evaluating future investment. As said, capital takes on a specific form; otherwise capital is confused with money, or with money-savings, which are the means by which capital is financed. How is new capital calculated? Firstly, by establishing a minimum limit determined by interest (value of the capital equipment at this interest rate). Bernácer’s statement is understood, if all of his work is understood and readers do not continue clinging on to Keynesian criteria about the marginal efficiency of capital. Let me explain myself. Bernácer stated ‘…new applications of capital are not done if the calculation is not performed first of the least profit corresponding to their market cost with respect to the current capitalisation rate’. He is speaking of the current capitalisation rate or the market interest rate. The least does not measure the value of the capital goods; it only establishes the minimum condition. The profitability of capital goods is measured by establishing the relation between yields B and the value of the capital goods, which is determined by the market. Therefore, if K is compared to the updated value of B, the internal profitability of the investment is obtained. This was Bernácer’s conclusion. The operational-financial mechanic was not formulated by Bernácer, but it is explained more than enough in any financial maths manual:

K = B a_nr

where K is known by the market and B is the chain of returns r, or the profitability of the capital goods.

a_ni = K/B⁵¹

The investment will be made provided that r > i.

He added throughout his body of work that when determining these yields, the true crux of the problem, prices and cost intervene. When investment, and thus production, increases, marginal costs quickly increase and prices not as much, due to market saturation. These are obvious conclusions reached by anyone knowledgeable about the rudiments of microeconomics. The consequence is that the returns, or chain of profits, or business utilities as cited in manuals of the time, diminish. This diminishing return will be what leads to investments being suspended, given that they will reach a point when they are equal to market interest.

They are probably halted before equalling market interest due to the fact that compensation will be demanded of at least the risk entailed by the investment task.

15.2. Risk, profitability and savings⁵²

The young Bernácer launched himself enthusiastically into explaining a vast and omnipotent intuition on the economic system. The book The Food Industry is behind him that was published in Alicante in 1906. His intuition is explained resolutely in 1916 in Society and Happiness. To be honest, I underrated this book, whose title continued with An Essay on Social Mechanics. I had reasons for disregarding it. A young man from Alicante with supposedly no scientific background in a capital of Spanish provinces; the most likely situation would be him writing a utopian piece, mixed with sociology, philosophy and passion.

Seven years after reading all of Bernácer’s work, except for this one, and dreading the task, I finally read the 582 pages of Society and Happiness. I paid dearly for having underestimated this master work. He set forth his thought clearly and originally that would be developed over the next forty years. Several basic concepts in this book made me think that I had to reread his extensive body of work. I carried out this arduous and exciting task quickly. I knew what I was doing and think I did it well.

This became relevant because the idea of risk related to profit appeared in this work, an issue that was masterfully set forth by Frank Knight. However, Bernácer did insert it into a general model, that of the theory of disposable funds. He did this not only with enormous scientific exactitude and vigour, but also explained it in great depth. Stated differently, the physiology of economics (physiology and anatomy) is explained by classical and neoclassical economists. Keynes did it better by explaining the income determination model. Bernácer, before Keynes, explained his peculiar model of the circulation of income. One part, among others, explained his theory on risk as related to profit. But in turn, risk comes and causes scarcity. Scarcity of what? Of savings. However, this part of his theory is not developed much.

He started by explaining a popular topic of his time: ‘If gold is more precious than iron and diamonds more precious than greenstone, it is not because of their greater utility, but due to their lesser abundance…’, The Interest of Capital, page 236. Then the absolute and percentage profits are related to abundance or scarcity of what helped generate them, which is capital and behind this, the savings that make it possible.

Capital equipment, skilled hands and an entrepreneur’s intelligence all help generate wealth. They are factors of production, which cannot be said of risk that is nothing more than a concept expressing a state of mind. Risk itself produces nothing, just as overcoming it does not produce anything. In an economy, images and metaphors are used, which are useful as long as the symbol is not confused with reality. Language is found along these roads. Thus, Bernácer said: ‘And although this will not always be due to error, but due to speaking consciously in a vulgar sense and due to linguistic brevity, it is no less true that it is accepted word for word by those little concerned with analysing concepts, with serious damage to scientific logic…’ .

Wealth generated by factors does not have inherent value either, at least not automatically. All of this is the fruit of abundance and scarcity. And nothing is abundant or scarce in itself. A good is scarce if demand is greater than the supply of wealth, although people intensely believe in this wealth.

If risk is not a factor, why do those who assume it and triumph obtain great profits? Risk entails an obstacle that not everyone surpasses to commit specific business activities. This means that the supply is scarce and profits, if there are any, are abundant. This abundance is relative because it indicates that wealth is distributed among few, the few who have overcome the risk. Thus, risk is not only a factor of production, but an obstacle to add to factors of production. Two complementary argumentations arise from this line of reasoning. The first is: it is always possible to obtain easy and convenient returns without any risk to savings. You just need to place savings on the financial market to get interest. In this market, the oldest placements of savings are overseeing and owning lands, which generate income. Of course there are other assets like perpetual annuity securities and others. Given that it is easy to obtain income without any risk, there will be a part of savings that will remain trapped there, making it scarce on the market.

There are investments with greater risk and others that are less risky. High risk ventures will be assumed by few and, even supposing that they succeed and keep production afloat, their supply will be reduced and therefore their high value. Due to this, profitability of invested capitals will be proportionally high. The system’s joint supply, not for a specific capitalist but as a whole, will be scaled by the marginal capitalist; where marginal capitalists are those who are willing to remove their capitals from each specific use as soon as yields are produced, with the estimated risk decreasing or increasing, or both.

Bernácer said (The Interest…, page 237): ‘If capital becomes more timid, the interest yielded by the riskiest occupations increases…’

These digressions on risk and profit have always been well-known by everybody, both scientific economists and businessmen. Knight expressed it masterfully. And Keynes did as well. These two economists (Bernácer held no degree as an economist) link risk with the determination of income. The two arguments that I said were complementary are a single argument for Bernácer and I will repeat it here.

With formed savings S, the system can always find a way to place it so that interest is earned free and without risk. A large portion of savings has found this method and then savings becomes scarce on the ordinary market. Interest made this scarcity possible. Capitalised savings, S_k, is distributed into different occupations or production areas, each with a risk level. Obviously, those with the greatest risk are undertaken by few and as it decreases, the abundance of offering entrepreneurs abounds.

In this way, products start off scarce or abundant, because risk has conditioned the greater or lesser abundance of savings placed in production activities. Then the market takes charge of rationing out profits, as it always does. Greater profits for the scarcest goods and less for the most abundant goods. The profitability of investments r slowly decreases from products with the highest risk to those with the least risk until reaching the border of financial interest, a zone where marginal capitalists wander.

Marginal returns r continue diminishing as investments are undertaken with less risk ξ, until reaching i, which is interest with a risk of ξ_ii = O.

Savings is divided because part of it leaves as disposable funds D to the financial market and the rest is capitalised savings. This chart indicates that first the investments are made with the most profitability and the most risk, and secondly, the way that savings is distributed in a risk and profit ratio.

15.3. Interest and time

Can interest exist without time? The answer is no. Scholars have said that since time is from God, interest is little more than taking advantage of divine fruits. Moreover, interest, which pertains to time, is the result of supply and demand.

There is nothing strange in this operation. Bernácer quoted Robertson in A Free Market Economy…: ‘This central mystery of the economic scheme: the theory of interest rates’. And this is not odd simply because when a financial asset is acquired, nothing more or less is being bought than the chain of future returns over time. The future is bought, or monetary capitals in the form of income pegged to time periods.

Financial-mathematical doctrine says that each monetary capital, or sum of money, has a different value at different times. Thus, M at time t is worth M and at t + n has a different worth. Then, if you buy a financial asset, in reality you are buying a chain of sums of money, income R, over a series of different times. And since the relationship of these updated Rs divided by the market price of securities determines the percent earning, with this percent being interest, then interest will be a price in time.

This issue of interest was explained in the introduction and is simple, which does not mean to say that there is not an enormous quarry of additional concepts that emerge from everything institutional, from money, from cycles, from psychological matters, from production, etc. Proof of this are the different sections written about interest and that even appear in other parts of the work. Again and again I return to the same issue, and over and over again, old issues will appear illuminated in different lights. Economists have also returned again and again to speak of interest and will continue doing so.

15.3.1. Interest and the disposal of capital over time

Savings necessarily involving sacrifice is an idea that has been expressed throughout recent years. The words used have been many: abstinence, wait, postponement, privation, planning, lack, etc.

As strange as it may seem, the Keynesian concept of liquidity belongs to this genre of ideas. Let’s first go back to Cassels. Classical economists (not Cassels) thought that since money was savings, it was the instrument for acquiring real capitals; financiers demanded this savings to acquire these capitals and increase production, then the grantors of savings or savers wanted to participate in the fruits of production. This aliquot participation would be called interest.

With Cassels, they start to attribute causation. Cassels said: ‘Waiting entails a person going without using a certain sum of available capital’ and further on: ‘Waiting raises the price of the negative aspect of interest, abstaining for a certain amount of time from consuming existing capital. Disposal of capital is the positive control of capital that is provided in the same period’ (Bernácer’s quote of Cassels). Bernácer, between the acquisition and application of capital on the one hand and, on the other, the mere disposal of capital, Cassels’ work seems like the precursor to Keynes’ liquidity. Bernácer further stated that Keynes, like Cassels, did not distinguish between capital and disposal of capital⁵³.

The epicentre of the problem, whose resolution will bring light to this complex issue, is as follows: If renunciation or waiting are in question (waiting for Cassels, renunciation for Keynes), then one must know for what one is waiting or renouncing.

If one waits, it will be to wait to receive the money earned, or wait to consume the goods one has renounced consuming.

Keynes aimed to clarify the point when he called interest: ‘the compensation for abandoning liquidity’ (Bernácer’s quote of Keynes). The term of compensation compensates for the pain or sacrifice. There will be no more compensation for the savings or renunciation of consumption, just the abandonment of liquid money. Keynes continued in his explanation: ‘interest is not compensation for not spending, but rather the compensation for not hoarding (Bernácer’s quote of Keynes). With this savings that can remain liquid, liquid assets are acquired that provide profitability or interest. These assets can be short-term debts, which for Keynes is practically money.

We return to the same confusion of defining money as equal to that which was acquired with it, and what was acquired are the assets that are on different sides of the market table.

Readers may also confuse liquidity with disposable funds. If these more or less liquid assets were acquired with savings, when they are bought, the savings are no longer available and stop being a disposable fund. It stops being a disposable fund in the same way as if you have bought a house or a machine. It would be different if you sell these liquid assets, transforming them into money and thus they will be totally liquid and available.

Liquidity and disposability are only equal when there is total liquidity, that is, when it is money.

Cassels’ work contains the murmurs of real neoclassical economics by confirming that the disposal of capital is abandoned when doing without the total possession of the already-formed savings. Keynes, the intelligent financier, forgot these whispers and also referred to formed savings. He paid attention to renouncing liquid money in exchange for other assets that provided profits via interest. Already-formed and totally liquid savings are fully available but do not provide profitability⁵⁴.

Monetary clouds are found in this strip of liquidity. That is the problem, that in these clouds we do not know exactly what the money is. It is an ambiguous strip, not the sharp dividing line that Bernácer signalled for the monetary floor. You have money or you don’t have it. If it is savings and it is in your hands, then it is disposable. If you have acquired short-term debt or other financial assets, obviously it is not available⁵⁵.

Do not confuse market terms. Disposable funds, due to being money with which one acquires something they want, is demand and the supply is what is wanted, or financial assets that Keynes called money. Obviously, one thing cannot simultaneously be supply and demand, in the same way that a football team cannot play against itself. This is the heart of the Keynesian ambiguity. Money is simultaneously supply and demand, obviously a mistake⁵⁶.

I do not tire of repeating it. These operations done due to the reciprocal meeting of available funds, which are demand, cannot be confused with supply, which are financial assets, and are also money for Keynes. I insist that they must not be confused. Not only are available funds and liquidity not equal, but are somewhat opposite on the market. And that these assets may be easily transformed into money does not avoid the buying and selling operation required so that the transformation is executed.

My insistence, which is not fanaticism, but scientific sincerity, is justified if it is admitted that these almost-liquid assets are found on this enormous and diverse financial market. The importance of this market and these assets on the general economy is known.

I can confirm that the dividing line that marks the monetary osmotic flow between the ordinary and the financial markets is established by easily-liquefiable financial assets. These assets are easily converted into money and money, in turn, is attracted to being converted into these assets. This means that communications between the financial market and the ordinary market are not like arteries, but more like tissues with a different density, permitting the passage of the internal liquids from one side to the other by osmosis. It is clear that the same cannot be said of other financial market assets, which are real assets like lands, building sites, property rights, etc.

15.4. Productivism

This section criticises proposals made to justify interest from the cause of the productivity of capital. To Bernácer, this is like saying that supply alone explains prices. Capital productivity for the majority –and this is logical– tells us that a product can be generated at a high volume, thus permitting its owner to obtain marginal profits. If a new technical procedure is introduced, producers will obtain an advantage that, due to being imitated by the competition, will gradually disappear. If the monopoly continues, additional and marginal profits continue as well.

This argument should not lead you to mistake that this is the origin of interest. Here, the man under criticism is the renowned economist Joseph Schumpeter. In 1955 (A Free Market Economy… page 159) Bernácer wrote: ‘Professor Schumpeter has tried to avoid the contradiction between the price theory and the productivist theory on interest, making gains from new technical progress the cause of interest; true, this is transitory, but progress is continual, and interest would be a coefficient of the technical advance. According to this ingenious judgement, interest would be the fruit of the relative monopoly enjoyed by capital, permitting owners to enjoy the new inventions…’

The criticism was clean, transparent. On the one hand, capital productivity explains why funds are demanded to acquire this capital and nothing else. If technical advances exist, they will be demanded with good reason, and if technical advances are monopolised, the profit will be greater and the capital will be demanded with greater reason (probably with the larger savings that larger profits have made possible.

Interest, beyond any theory, is a price and what productivist theory explains is the relative enthusiasm of demand. The other side must be analysed, which is supply. Supply is the savings formed, another part, which as explained become insufficient.

Another criticism is implicit from the first argument. Demanding savings means paying a price for it. My reasoning is not hindered by where this savings comes from (explicit or implicit cost). Interest is a cost that one pays to have. I believe this point has been universally admitted since time immemorial.

One cannot say that profits are the origin of interest when this profit is determined arithmetically and conceptually by the difference between income (derived from productivist causation) and costs (where interest is part of this). If interest is part of the cost (one of its components), it cannot be said that profit is the origin of interest, and less when revenue is explained by specific conditions of capital, such as technical advances.

In summary, capital productivity, its greatest productivity if you like due to technical advances and its greater capacity due to a monopoly being established, only explains the strength of demand. Since interest is a price, the other side must be explained: supply.

15.5. The insufficiency of savings

Scarcity and abundance are not absolute terms but relative terms. Malt as a stimulant may be extremely scarce in absolute terms, but if nobody demands it, it becomes abundant. During wartime, blood serum can be supplied in enormous quantities, but if the demand made by doctors to treat wounded soldiers is higher, then the serum is scarce.

Savings is scarce because it has different aims: one, the natural and hygienic one from an economic viewpoint, which is to finance capital goods. The other is the speculative market. However, this still does not explain its insufficiency since if demand is small, it would become relatively abundant again.

Savings do become scarce because they are continually robbed by the anxious tensions of the hands of speculators on the financial market.

They also become scarce because progress continues and this progress increases productivity and reduces costs. Humanity, as a consequence of evolution and progress, demands increasingly more goods. This demand for goods is met by a productive sector equipped with more technological and productive capital. These are good arguments that reinforce the productivist body of thought, but only with respect to the demand for savings to finance capital goods. This greater demand is one of the causes explaining the relative scarcity of savings.

But humanity had the providence of a King Midas who came to remedy the frugality of savings. This was the banking system with the capacity to create money. Private banks, as well known by any economist, can create money. Capital goods are formed and financed with money and no one cares, not even the system, if this money is savings or new money created by the system. It can be used to acquire fixed and working capital goods.

It is clear that we shouldn’t be concerned about insufficient savings if it is accompanied by a new monetary influx through new money created by the banking system. If there is a greater demand for savings by a system eager to acquire capital goods, great, given that there will be new money that can always meet the new requests of investor-capitalists.

If there is a greater demand for savings, there is no reason for interest rates to go up. The banking system is tireless in the fight to subdue interest, because its tenacity to create money is also tireless.

But interest does not drop despite the supply of savings being helped by the provision of new money. And if it doesn’t go down, despite the larger supply, it is because something is happening in the economic system.

As established already, there is a specific demand for savings and new money (and why wouldn’t it be easier just to speak of money?). Furthermore, savings is aided by the creation of new money, interest persists in surviving and sometimes even goes up, the reason for this strange phenomenon must be considered. It is the same question we would ask if a car’s petrol were insufficient to travel a specific route and we also assume that the car is continually provided with new petrol. The answer could only be that there was an escape in the fuel tank. The income tank that is generated on the ordinary market, the true production engine of the economy, is savings or disposable funds. Via spending and investment, it returns to the circuit. But there are maximum disposable funds, or simply disposable funds, which do not return to the ordinary market, but flee from it. Where do they go? They go to the financial market. This is how savings and even new money can partly escape to the financial market, becoming scarce on the ordinary market. This scarcity is measured via a price, interest, that is reluctant to disappear.

In this way, the economic system’s zeal to grow and innovate, zeal calibrated by the demand for savings, is calmed by another zeal, that of the financial market to survive. On both markets, economic agents seek monetary profitability. Economists know that the important thing is real or production profits, which are the ordinary market, but not all economic agents are economists and if they were, they wouldn’t care, because they simply seek monetary profitability.

I repeat that Bernácer believed that Keynes focused on the wrong problem. Savings is not what is insufficient. It seems like the true concern of Keynes is not this, but liquidity preference. This savings, insufficient or not, can remain liquid or not. If it is liquid, it renounces profitability and if not, it earns profits via placement in financial assets. That was his obsession. Here no, given that the maintenance of another placement of savings into more or less liquid assets is stealing savings from the ordinary market and making them scarce. Interest is born from this scarcity.

Now you know where interest is born. However, after it appeared in Keynes’ theory, he did not explain it well. Keeping money totally liquid renounces something, interest, which is already a datum in his problem. The monetary belief of modern macroeconomics developed from the cracks in this obstinate and poorly-founded belief.

There is more. I could even say that interest would disappear or tend towards disappearance, whenever the financial market has a limit. This limit is somewhat conditioned by the ordinary market since it comes from there. Dead wealth, the financial market, was alive at some point and it was alive because it was born. In principle, it was created by the ordinary market. Financial assets involved the channelling of savings to investment and many actual assets involve the creation of national product and generated production income. They are no longer living wealth and therefore, their survival has a limit. If this limit exists, there is no reason to put limits on savings on the ordinary market⁵⁷.

Securities created to finance production activities, like shares, debt and even those earmarked to finance working capital in short-term debt, form part of the supply of securities on the market. It is a supply like any other that, whether potatoes or automobiles, is exchanged for money, so that the supply of goods possible due to the issuance of securities is competing inside the same house, that is the financing process.

Out of the goods that are produced; only part remain immobilised outside of the market in fixed capital. The rest are consumer goods and/or factors of working capital for immediate consumption. Nonetheless, securities or bearer securities or financial assets-liabilities live on. They don’t rip and break when they have transferred their natural duty of taking savings to investment, but continue living as a living material that needs a blood flow to survive, a flow that is monetary. Thus, this is the way they survive while securities or secondary financial assets remain that are derived from past financing, which are added to those from present financing. Part, and only part, of the goods created are up against this mountain. This fraction is a flow of past national products that live on. They are part of consumer goods and working capital.

This means that our financial assets grow, multiply and are distributed, covering the economic world. If they grow, it is because they can and the only way to make this multiplication possible is money. If there were not money, they could not be born or be exchanged and this market would disappear. This money is called savings, or non-capitalised savings S, which I have called maximum disposable funds, or simply disposable funds (S = S_k + D), where S is total savings, S_k capitalised savings and D is disposable funds or non-capitalised savings.

Savings is continually snatched away by the financial market. This financial market grows more quickly than the ordinary market, the reason why scarcity occurs in this market, generating interest. Even if there were not an intense demand for funds for production aims, even then interest would appear. Once again, the productivist body of thought is damaged.

I have yet to explain where so much saving comes from to be able to finance an expansive financial market. The money does not come from savings, or at least not only from savings, that finances this market. Don’t forget that the banking system creates money. I have said that the system creates money and that is why interest will tend to drop. However, compared to this generous supply of monetary rivers earmarked for irrigating the gardens of the ordinary market, there is a deviation, inserted into the irrigation channel, which makes part of this money flood the financial market, which is in constant expansion.

The banking system tirelessly creates money and the financial market tirelessly lives on. In the same way that the ordinary market fights to survive, it paradoxically manufactures its own destruction by trying to finance using these financial assets. These financial assets are living cells that make the economic system grow, but that inevitably change into malign cells later, only that the banking system in a certain way generates the bodies that satiate the appetite of these cells, making the survival of life in the economic system possible.

15.5.1. A serious mistake by Germán Bernácer⁵⁸

Scientists who study the inside of plants, the cells, chlorophyll, the mysterious process of photosynthesis, are almost surely unaware of the shape of the tree or the overall forest. If they entered the forest, they may get lost. Bernácer did not get lost, but he did overlook certain matters. One of them is the following.

I am talking about interest. I will strangely enough follow the Bernacerian analysis. I will follow it strictly and conventionally. He wrote that whoever demands goods is really supplying money and whoever is supplying goods is really demanding money. This is purely and simply elementary market mechanics. The same can be said of financial assets. Whoever is supplying them is demanding money and whoever is demanding them is supplying money.

With what money are financial assets demanded? With disposable funds (D), which are non-capitalised savings… (D = S – S_k). If savings is not capitalised, this means that it has not been spent or invested, which means, as I have said many times herein, that it has been stolen from the ordinary market. Whoever sells financial assets receives these disposable funds and remains without their assets. From the meeting up of the supply of and demand for these assets, the price is determined or the market quote V. This market price is possible due to the concurrence of the supply and demand of disposable funds when being bought with the income (non-production) they generate, determines the interest rate i. Up to here, Bernácer and I agree.

The neoclassical statement is also true when they state that a supply and demand for savings exist with the aim of demanding production capital. It exists and it is obvious that it exists because it is the savings that has not gone to the financial market (S_k). It is savings supplied on the ordinary market. It is this savings that is demanded. You cannot supply what you do not have and what isn’t available. The disposable funds have gone to the financial market and, therefore, are no longer available. What is available or the supply is demanded (S_k) and savings S_k is supplied.

Stated differently: there is a sale and purchase of disposable funds that reflect the reciprocal operations of the sale and purchase of our financial assets, from which the market price for securities arises, letting financial interest be obtained. From what is left, savings that are not disposable funds S_k, there is a supply and demand that reciprocally mirrors the demand and supply operations of the capital market. A price emerges from here also, which is also a price of money. It is an interest rate, ordinary interest or the ordinary market interest rate. That is my interpretation.

My previous statements fit perfectly with these conclusions, since if the financial market continually grows, the usurpation of funds is constant and, therefore, savings becomes scarce on the ordinary market (S_k becomes scarce!) and interest goes up. This means that there are no savings to invest but there are savings for speculation.

That savings become scarce and ordinary interest rates rise are different names for the same thing, but it is not the same to call the price of money with the simple name of interest. You must ask what type of money. However, this question is formulated poorly. It must be asked in the following way: From what type of savings? Or, what is being spoken of, disposable funds or non-capitalised savings D or capitalised savings S_k? Because if speaking of the first, it refers to the financial market or the price of disposable funds. But if speaking of the second case, it refers to the ordinary market or the price of capitalised savings.

Bernácer touched upon one issue and the other, the ordinary market and the financial market, capitalised savings S_k and disposable funds or non-capitalised savings D, and he studied the ebb and flow of these monetary currents from one market to the other. He even invented a mechanical gadget on paper that is utilised by physicists (remember that Bernácer was a physics professor) to explain the circulation process of these flows of unspent income or savings. However, as strange as it may seem, being how it was, at the edge of the barrier, he did not know how to see the existence of these two types of interest.

Obviously, the botanist, the scientist, does not see the forest for the trees. However, the humble forester writing this book does know the forest a bit. He knows about it because he has sat on the giant’s shoulders.

I have written several articles about this particular issue (A Triple Theory of Interest, ‘ICE Bulletin’) developing and appraising Bernácer’s macroeconomics. One issue not dealt with is the following. If disposable funds D flee to the financial market, making them scarce on the ordinary market, why doesn’t interest drop? The next question should be: If interest drops, does it stop being attractive to the financial market?

The answer to the first question is that interest (i = R/V) does not decrease because the financial market is continually growing with respect to the number and variety of securities and thus makes the percent profitability change little. Thus, new disposable funds arrive, aided or not by new money, to finance a higher number of securities that are more varied. The variety is conditioned by the perfection and sophistication of financial markets.

The answer to the second question is that interest drops because securities increase in value in relation to the income received (non-production income: –Δi = R/ΔV). Nonetheless and according to Bernácer, those placing the funds can alter their psychological condition. Thus, the comfortable financiers placing their savings to accrue an easy income can transform into avid speculators seeking quick returns via increases in security prices. Obviously, they do not care if the interest is high or low if they can triple the value of their financial assets. Keynes the speculator explained this process well, which develops over time. When waters return to the channel, incomes R oscillate; the same as the value of V and the percent profitability.

A graphic and synthetic explanation to summarise this situation could be as follows.

Supply and demand of … D (disposable funds) … V ................ i

Supply and demand of S_k (S_k = S – D )… Supply and demand of money … determines – ? (+)

(+) Not explained by Bernácer, but what doubt is there that it is another interest rate, always monetary, but ordinary.

15.6. The cause of interest: errors

The genesis of capitalisation entails the genesis of savings. This genesis is complex and includes a series of intermediate actions, such as: savings (causes of…), the accumulation of savings (how, where and how much), investment, an operation representing the financing of new capital equipment, amortisation and the creation of capital equipment and the establishment of actual capital. During these processes, interest plays a large role and the theories that have tried to explain it have committed a series of mistakes: some, because they link the formation of savings with the act of privation or sacrifice. This is the case of Böhm-Bawerk. Others, like Keynes, relate it to the act of coming from totally-formed, liquid capital. The last group is where Schumpeter and others are found, relating interest to the act of investing this savings in industrial capital that can yield capital gains.

These theories are not totally false, only partially, just as they are partially true. Interest is a price and thus is the result of a bilateral relationship agreed upon by someone who buys or exchanges one thing for another, which is present money against future money, total liquidity for profitable assets, etc. However, from this one cannot conclude that interest will be positive. Just the lack of enough savings is enough to make it become expensive and be a positive price. Borrowers do not know, and do not care, if the lender has undergone calamities or has lost liquidity or not. And the lender does not care whether the borrower will obtain beneficial production profitability in his business.

When liquid capital (a badly-expressed term I know) is lent and generates interest, it is in favour of its owner, but not to those who lend it, the capitalist moneylender. Therefore, it is obvious that capital productivity does not give rise to interest, since this is produced, whether or not there is production investment. Interest does not arise from the special advantages of specific capital (capital is also concrete; there is no abstract capital), but rather from the cession of funds over time. Interest arises before it is added to industry. The only thing that industrial productivity explains is the condition that the loan is made and can be returned, nothing more.

Bernácer insisted: ‘If capital is borrowed, interest favours the owner, not the user of the actual capital’, (A Free Market Economy…, page 164, 1945).

Everybody, the marginalists, Keynes and the productivists, start from an error. The mistake is focusing on interest partially from the side of demand. Productivists, heirs of real classical economics, confuse capital as a material instrument and the material as money or, more succinctly, as savings-money. The difference between one and the other is that the first represents a part of the produced production necessary for producing more. The second, liquid, means potential control of the market. Due to meaning savings, it represents the capacity that gravitates over the system to demand real capital. These demands are resources that have avoided consumption and, therefore, are expectant to acquire real capital. The bad thing is that they are also awaiting the acquisition of financial assets.

Confusing real capital and savings with that which is acquired makes the error possible that ends with it, in capital, the cause of interest and we know that even so, considering savings as a cause of interest, the error is born, since the origin of interest rests outside of the ordinary market.

15.6.1. Keynes’ vicious circle

Is there any way to define capital abstractly? Yes, provided that it does not refer to capital but simply to money. Keynes’ theory on liquidity preference refers strictly to a monetary theory. To Bernácer, who wrote his theory of disposable funds in 1922 and about interest in 1925, Keynes theory is corrupt, since one cannot see an initial causation in it. On the one hand, he said that the cause of interest is in the liquidity preference, which rests with interest and its future evolution. But when he moved on to explaining interest, he established causation in the liquidity preference. There is another ambiguity in the fact that he established how interest originated in liquidity preference, which indicates how interest depends on the marginal efficiency of capital.

A clarification is required here. Bernácer started directly with the theory explained directly by Keynes and not from the painstaking and lengthy formulation set forth by Keynesians. His followers seem to say that Keynes’ interest originates in the money market and establishes a border whose limit is set by the marginal efficiency of capital. If this is so, the last criticism of Bernácer turns out to be unfounded.

15.6.2. Equilibrium between productivity and interest⁵⁹

Turgot may have been the economist who originally explained the law of marginal diminishing returns. David Ricardo and his treatise on land rental fall within classical economics, whose economists would give scientific strength to the law of diminishing returns. Bernácer, heir of Turgot as he himself said, repeatedly cites the law of diminishing returns. And like Turgot, he also explained the interest of money. Evidently, Bernácer was not a physiocrat like Turgot and the 150 years of distance separating them made it possible for economists to know more about money.

This preamble is to justify how Bernácer in 1916 and particularly in 1925 explained how reconciliation was produced between the marginal productivity of capital and interest. This is the explanation.

Interest is born outside of production. It is born on the financial market with disposable funds from the ordinary market. Upon establishing interest, potential investors know that they can obtain minimum monetary profits (interest) from their savings. Consequently, savings that are really invested obtain productivity provided that they are greater than interest (r > i). But the accumulation of capitals makes the capitals that are successively added to the system less attractive, due to diminishing returns. They will be less attractive until they reach a zone (not a point) in which the last unit of capital incorporated draws close to interest. The graph below depicts this.

If interest drops, more capitals will be incorporated to industry and even though returns are diminishing, they will still be higher than marginal financial profitability or interest. Interest is a lock that prevents capitals from entering industry. If this lock is tighter, capitals that used to be attractive are no longer attractive. The reverse is also true.

Note: This graph is from a numerical explanation formulated by Bernácer, although I made the graph.

This phenomenon can be explained in a different way. Disposable funds that have fled to the financial market, making interest possible, are resources (savings) that would have financed capital goods. The formation of these possibilities thus makes it possible for this capital to become scarce and not be totally applied in industry.

I used the term ‘zone’, not point, in the graph, because production activity obviously entails a risk that must be compensated with something more than profitability, equal to interest.

The similarity to Keynes is clear. However, it isn’t if you look carefully at the phenomenon. For Keynes, interest is born in the liquidity preference. From the light of the present day, this could be restated as being born on the money market as the result of the supply and demand for money. Demand will be formed by the demand for transactions, demand for precaution and speculative demand. After interest is formed, capitalists add it as a datum to calculate the margin of their investments.

However, for Bernácer (in the year 1922), interest is born on the financial market as a result of the supply and demand of disposable funds (D = S – S_k), or the meeting of the demand for securities on the financial market. It is born on the financial market and no other market. This means that transactional demand is not present nor all the monetary supply, but only a part. The monetary supply of demanders of securities enters and only the demand for money of the suppliers of securities participates. If Keynes and Bernácer are similar in any way, it is that Keynes’ elastic part of monetary demand is influenced by the speculative.

After making this clarification and locating interest, the analyses are formally similar, as they compare the marginal productivity of capital (which Keynes called marginal efficiency) with the interest rate.

Robertson participated in these finds in the twenties. It is difficult to believe that he would not have talked of them with the clever speculator Keynes. Both Keynes and Bernácer were now around forty years old, a decade with great creational force and the beginning of reflection. I believe that Keynes confused the term disposable fund with liquidity, seriously changing not only the concept of what money is, but his reasoning on the market itself and, of course, interest. The qualification of Keynes as a speculator is both positive and ambiguous, as he was an intelligent, intellectual speculator of his ideas and others’ ideas, like Wicksell and probably Bernácer. He was also a financial speculator, although he did not realize that one can only speculate with that part of income that has not been consumed or capitalised, that is disposable funds.

15.6.3. Interest in saving and interest from savings

Several reasons lead us to save. Future security, capital accumulation and financing for industrialists, greater consumption expenses (proportionally to accrued savings), etc. are concerns that push people to save.

A common expression says that thanks to savings we can consume tomorrow. People frequently claim that pensioners live from past work. This is not true. What happens is that the metaphor is confused with reality and the reality is present consumption. When the pensioner gets dressed or takes a taxi, she is using present goods and services and not past ones. Only remotely will she consume the thousands of socks her mother knit her when she was young, to put them on when she was older. I could say the same of her home. Present work in collaboration with present capital goods provides the consumer goods that are consumed in the present.

Yet to be explained is not the bridge of gold that lets savings travel to investment, but the bridge of time that lets the present generation (including pensioners) consume accumulated work. This is more precisely about the part of work earned, which is unconsumed income, which is past savings.

This explanation revalidates another, which is the individual need for savings, which is complemented by the group need.

The person who saves individually does not keep the savings with him, but rather lends it. As a whole, in society, what is saved is capitalised –not all of it as we will see. But individual savers can have it available to spend (not disposable fund). Then, if the saved part of income has been capitalised in the system, how is it possible for individual savers to have it available?

These types of disquieting questions, like a swarm of bees, can irritate and rattle economists who think they have learned the lesson well.

Savers can have their savings available, clearly not the capitalised part that has stopped being disposable, but the new savings managed in the system.

Savers know little or nothing about the destiny of their savings. Part has gone to industrialists that have applied for loans, either directly or via the bridge of the financial system, where it has been capitalised. New capital goods let the system continue with production. This is the justification of individual and group savings, that production continues and can be consumed. The efficiency of capital goods makes better and larger consumption possible and if the production level is greater than the previous then savings continue to be justified.

Savers will require part of this savings: everything they lent and that the system will return to him in liquid directly and illiquid indirectly. Liquid with the savings that are generated day by day. With these monetary resources, goods can be acquired that capitalisation made possible. This is the expanded shopping cart. This expansion is interest. The expanded shopping cart is the illiquid manifestation of savings.

Goods that are consumed with returned savings are present production, as seen, and they have been possible due to the collaboration of present work and present capital goods, but that were built and financed with past savings. This is the financial and temporal bridge of savings.

15.7. Savings and capitalisation

Between savings and investment, there is an operation called borrowing. Borrowing can even take place for a single person. It is called self-financing. It is a trading operation of different money. Money (financiers call it capital sum) at different times is different; these different moneys are the object of trade. Thus, he sells what he lends and buys what he has asked to borrow. Whoever lends sells present money and whoever buys does it with future money. Both must be equivalent financially over time.

The final destination of savings is capitalisation. Thus, this savings takes shape in something concrete, useful and productive. I continue by citing a famous sentence by Bernácer: ‘Savings without capitalisation is fraud for the community.’ If it is true that it is hoarded and is placed onto the financial market, savings is frustrated in these operations. A dissertation starts here about the process of savings and investment. Both operations are different and they are not even equal later. Since this issue is handled extensively hereinafter, I will only make one comment about this central topic.

It is true that production and national income are equal. But this identity that is so obvious has tricked many economists, including Keynes. Thus, production of consumer goods is confused, which is a flow coming from national product. The confusion for Bernácer was approached as follows: If income and production are equal, what is spent on consumer goods is a demand that acquires the production of consumer goods, which is true, but not totally true. One part of this income, what is earmarked for consumer spending, may be equal, higher or less than the production of consumer goods.

However, the part of income that is not consumed and that is saved is vastly more important. For Keynes, and this is a mistake in capital letters, the production of capital goods is absorbed by the part of income that is saved. That is not true. On the one hand, it is obvious that saving is an operation and the production of capital articles is another (not an identity). Unlike what Keynes believed, it is not an initiative to produce capital articles instead of consumer goods, an initiative that is done with system savings (not that are done, but that are planned). Capitalisation is a trade transaction through which, with available savings, capital articles are acquired and/ or help is provided to form them. The question is different. You already know that other trade operations are done with savings, specifically financial ones. But this doesn’t bother economists, for whom accounts are forcibly balanced. So, since part of savings is not capitalised, there are unsold products, or inventory investments I_u. Thus, investments properly speaking are added to the others, the frustrated investments that are mistakenly called inventory investments, giving us the savings in the system. So easy and so wrong.

15.7.1. Speculation

There is always the possibility of placing savings –which stop being available– to accrue steady income from it over time⁶⁰. There are two reasons competing for the formation of disposable funds. One is obtaining these earnings and the other is speculation itself, an exploitation of price oscillations. Price oscillations have a double origin. One is found outside of speculative forces and is due to factors normally foreign to the market and the other is those encouraged by the powers of the current of speculation.

Whatever the origin, what is true is that this force rests in the travel of disposable funds that are used for speculation on the speculative market.

The financial market has the ability to draw the same goods into its fold that derive from current production. Thus, people have speculated with cotton, cacao, coffee, etc. People have also speculated with certain goods that seem somewhat similar to capital, like warships and manufacturing facilities. Currency, the British pound earlier and now the dollar, is the object of speculation. The phenomenon requires an understanding of the formation of savings that finances speculative and not production activities. This process requires the incorporation of new masses of savings that avoid being capitalised.

Like foam, speculation rises, but when it goes down the torrent does not return to an economy that has been depressed. This means that when speculation eases, the value of assets drops and interest rises, making investment impossible. What is of interest here is that savings in production activities lets there be equivalence between the real and monetary economy, between savings and investment, between the past and the future, between past and present production. In a social sense, it prevents fraud between generations. In this way, with absolute macroeconomic honesty, those who saved in yesteryear can consume and live from the work of others in the present.

Speculation lets people live from the work of others now and in the future, with them delivering nothing by way of capitalisation so that this operation can be executed. In a social sense, speculation cheats production and the future.

Since you can speculate with savings, the speculative market becomes huge, fluid, making diverse risk, security and liquidity margins and structures possible. The financial market makes liquidity preference possible. Thus, the total liquidity preference has its opposite in the non-liquidity preference of speculators, who have already placed their savings and, paradoxically, speculators also oppose the non-liquidity preference of the holders of real assets and investors. The disjunctive between the ordinary market and the financial market will establish the dynamic of the economic system. An explanation of the financial market is next.

16. The financial market

16.1. Introduction

I have spoken of the financial market several times now and have given a rudimentary explanation of what it is. Bernácer called it the income market and the assets traded there income assets. I have called them simply our financial assets.

He called them income assets because they are assets that provide earnings or income just by having them. He emphasised the fact that they generate income, which is very important, because it comfortably guarantees savers income due to receiving free payments. As you will see, it is one of the fundamental motivations of savers and buyers of money.

Not all financial assets, even when they are income-yielding assets, belong to the category of our financial assets. Belonging to this peculiar breed are those that generate returns, but have fulfilled their mission of transferring savings to investment and currently do not fulfil any production mission, not even productive savings.

Also belonging to the group of our financial assets are certain real assets that are bought, sold and kept, due to their capacity of generating income, such as property rents. They are characterised by not representing the creation of a new product or the subsequent generation of gainful income. Of course the rental of a house is the payment for a service. A house, unlike a consumer good, is consumed very slowly, with this consumption representing its obvious utilisation. This usage may represent a contribution to national product for whose service rent is paid, which is income. In other words: the value of a house is the updating of a chain of earnings; this chain is the updating of incomes or rent. In this sense, a property does mean a new product, but the repeated sale and purchase of the same property for a higher value than the original does not mean a new product or new production income⁶¹.

The term income used until now on the financial market will mean the simple reception of monetary income deriving from the possession of an asset in our market. This is simply income as a consequence of payment to the production process in the ordinary market.

Bernácer gave different specific names to the financial assets in our market and generically called them ‘income-yielding assets’. He called them capital placement articles, country and urban properties⁶², securities that represent existing capitals (shares and obligations from industrial entities), simple symbols of debts contracted and not backed by any individual property, such as public debt securities. He said: ‘Such transactions form a considerable volume of a country’s financial operations; just look at the sums of stock market and trade operations and real estate mortgages⁶³ (A Free Market Economy…, page 73, 1955). Bernácer wrote in a certain era and a certain country, Spain, in which the financial market was not highly developed and the extraordinary variety of complex operations and assets simply did not exist that characterise modern economies. In the present day, these operations and these assets take on enormous proportions due to their variety and complexity. Just think of the futures market, the commodities market or the options market. The financial market, dead wealth as Bernácer saw it, does nothing more than unfold in the economy and the variety of operations and assets does not hide its ulterior motive, which is speculative and not productive. Bernácer called them income assets. He misnamed them because they are not assets, perhaps they were and perhaps they helped form assets, but not in the periods after production. As to the rest, there is enough reason to call them anti-wealth, in the same way that modern physicists speak of anti-matter.

Money against merchandise in the financial market

The price of merchandise and services is expressed in monetary units and the market price of financial assets as well. The values are securities that give owners a right to a specific sum of money. Loans, advances and bill discounts negotiated are also present currency against future currency. Both terms, although they are past and future, are ready money, along with papers, they come together under the broad and ambiguous name of money.

Bernácer, son of a merchant in Alicante, a provincial yet commercial port town, surely was used to certain business practices. John Maynard Keynes had similar experience in his administrative tasks at the British Exchequer and on the stock market, albeit in a much larger and more grandiose setting.

Years later (1955) Bernácer would say that Keynes was very wrong, like the majority of economists. For Keynes, there is a very superficial circumstance that differentiates money from what it is not. This is time. Money is the part of debt that has a term of three months or less. Three-month debts and Treasury promissory notes comprise an important sector of the money market: the discount market. If it intermingles with the money market, you no longer know what is being bought and what is being sold and the problem gets more complex instead of being resolved.

Debts are documented; they are securities with specific legal profiles. The same thing happens with treasury promissory notes and short-term debts. All of them are bought and sold for money and therefore have a price. For an operation to take place on the market, the two opposite sides must be present: supply and demand. Supply brings what it is offering and demand brings money. In this market in particular, supply entails short-term debt (or long-term, it doesn’t matter) and demand brings money. There is an exchange of these financial assets for money, and then if they are exchanged for money, they are not simply money.

Clearly, Keynes confused market terms. Thus, Bernácer said (A Free Market Economy…, page 118, 1955): ‘If we consider something that requires money for its conveyance as money, we commit a double error, calling something potential demand that is really the opposite’. This means that supply decreases to the same degree that demand artificially increases, doubly misplacing these market terms. Supplies of short-term securities, when they become money (wrongly), then become demand, something that does not happen like that.

These short-term assets, or short-term debts, are a part of the extensive range of financial assets in our market. Their citation in this section is obligatory, because therein lies a serious confusion on the market, as explained⁶⁴.

Of course, this range of assets is easily transformed into money, but this does not change market operatives. To convert them into liquid assets or money, they must be sold to someone who buys them in exchange for money. This is inevitable. My arguments do not change at all even for someone who exchanges them with great facility, speed and security.

It is a different case when these assets are used as money. Then, potential supply decreases and demand increases. But this is another matter. Deceased professor Emilio Figueroa and I worked on this last issue and published several articles about it. Figueroa was a student of Germán Bernácer.

16.2. Requirement of financial operations

For financial operations to exist, money, income assets and time must necessarily concur. It is clear that any activity, no matter how quickly it happens, occupies a period of time. This is not the sense I mean. I meant that time directly participates in the operations. Financial activities on the money and capital market (I am using the term capital improperly here in the sense of money-savings) are an exchange between present money against future money. Equal amounts of money become different at different times, which is the basic rule of financial transactions.

A man buying a financial asset buys it with money, can recover this money in the future by selling the financial asset in exchange for money. If he receives more, there will have been speculation. If he receives the same amount of money, his capital will have been different and will be relatively less. The capital he receives may be somewhat more than he delivered, but financially (in terms of mathematical-financial equivalency (1 + i)ⁿ) will be equal. Another case is that he does not sell the volume of assets acquired in the future, but keeps them instead to enjoy the income they earn.

In all cases, speculation exists given that present money has been put into play against a hope, either of selling these assets or receiving future hypothetical income. Thus, time will be the distance that separates reality from what is probable. Time is clearly an indispensable faction for the existence of financial operations. The other two are money and financial assets. Let’s talk about money.

Money that enters the speculative market is money that is not necessary for the existence of individuals or companies. Consequently, it does not go towards consumption or investment; it is the maximum disposable fund: D (S – S_k = D); where S is total savings and S_k is capitalised savings).

Whoever sells financial assets receives a disposable fund from the people buying them. In this way, the volume of disposable funds in the system does not change by this operation alone. If more disposable funds arrive than leave or are liquidated for capitalisation or consumption, then disposable funds increase. If the opposite happens, they decrease. I call these operations variations in net disposable funds, a matter that is essential to market mechanics and economic cycles.

Sometimes Bernácer’s observations are so obvious that I don’t notice them at first. One of these observations is: Savings must be formed collectively and be institutionalised. If not, if each person saves at home, even though the sum of all these home savers is equal to what would be formed institutionally at a bank, the financing process of large capitals (factors of production) would be very difficult. Hundreds of thousands of tiny streams do not have the force of one great river.

Savings undergoes an accumulation process before being transferred to capital financing. During this formation period, even when its finality is investment, it is a disposable fund.

The matter would not be important and would only be a question of time if the process did not suffer from the constant attraction of our financial assets.

Some companies are self-financing and others are not. Self-financing companies cover the depreciation of capital goods and if something is left over, they acquire new capitals. The first funds, those that cover depreciation, are called sinking funds. Undistributed profits make up a fund that lets a series of activities be executed, like those described earlier. These funds are not gathering dust in the bottom of safes, but are placed via the purchase of specific assets, so that a determined equilibrium is maintained between profitability, security and liquidity. These characteristics, in turn, will depend on the destination of the funds and the proximity of this destination. If its end is investment, either replacement investment or net investment, financial assets will have these characteristics of profitability, etc. .

This is a crucial point since it represents the point or osmotic membrane where the real and financial markets communicate. Indeed, undistributed profits are disposable funds that finance the acquisition of these assets. Whoever sells them receives the disposable funds that companies no longer have. If due to adverse market conditions, the financial market becomes highly profitable, companies, seeking monetary profitability above all else, may forget their honest macroeconomic destiny, production, in favour of speculation. This has happened several times.

The process will entail company decapitalisation, since these undistributed profits or disposable funds are not recycled into replacement and net investments, turning to the financial market instead. Then the financial market is capitalised to the same degree as the ordinary market has been decapitalised. The oxygenated blood is corrupted and the system is asphyxiated.

The key to explaining part of economic crises is found in these savings and capitalisation operations done by companies with their sinking funds and reserves.

Financial assets, disposable funds and time all concur in financial operations. But one more thing is still missing: the intention to speculate.

16.3. The market protagonists

Supplies to the financial market are comprised of all those non-liquid properties and securities owned by holders of income-yielding assets. It is potential supply. Demand is money and the desire to acquire these illiquid securities. This is a constant on all markets. Demand is money and the desire for something, in this case for financial assets or illiquid securities. Demand will be aided by credits or the creation of money by the banking system. Supply, I will say potential given that it is highly likely that its owners will not want to part with some of it.

What has taken place are buying and selling operations executed on the market. It is actual demand and supply. Demand is money given in exchange for what is acquired. They are disposable funds. Supplies are the goods given in exchange. Assets in this market are called income-yielding assets or financial assets. Money, or disposable funds, given in exchange for these assets (properties or illiquid securities) is the price or market quote.

If the price goes up, there are more suppliers who want to sell, guided not only by their desire for profits but also by the fear of market prices dropping. This is a market characterised by the enormous flexibility of market prices, unlike the ordinary goods market and of supplies or factors of production that are rigid and tend to decrease. Demand is reluctant to buy when prices rise, not only because real incomes (real disposable funds would be more correct) are smaller, but also because they don’t want to do bad business in case these high prices fall tomorrow. The task of calculating the value or price of financial assets still lies ahead. On this market, assets, unlike ordinary goods that provide a utility or chain of utilities (consumer goods, permanent consumption and capital), generate a chain of returns (unpaid). They are acquired for the capacity to speculate and/or obtain a profit from their purchase and sale and/or for their capacity to earn.

The market is perfectly informed about this issue, since value can be calculated using a simple business formula. To do so, the updated chain of returns at the present moment is established.

When you buy a financial asset, you are buying all returns updated over time.

The updating or interest rate is different for each asset. Some generate large profits but are subject to great risk. Others, like real estate –a building for example– generate income that is not so high, but their values are quite stable, but other real estate may even generate negative income due to generating expenses higher than income, such as hunting reserves, fun parks, etc. There is no valuation problem, because subjects evaluate the risk-profit ratio, establishing the price of the financial assets.

In principle, a theoretical value of these assets can be established. There are two methods, or rather one method expressed in two ways. It is all a question of percentages. Thus:

a) The price or yield that one unit of liquid income R acquires. Stated differently, the percent yield of placed disposable funds. If 100,000 euros of disposable funds are placed, letting you obtain 500 of liquid income R, the percent yield is 5000/100,000 or 5% of income⁶⁵.

b) Asking the number of units of liquid income that can be obtained via the placement of 100 monetary units. Let’s say there is 5% interest, to equate each euro of actual income, it would be 20. This is calculated by investing 5%: 100/5, which is equal to 20.

a) and b) mean the same. If interest is high, the lower the price will be for the unit of income. If interest is low, the higher the price will be for the unit of income. In the first case, the quantities of income demanded will be greater and in the second case less. Economic agents will say that if you can earn high income for a low price or few disposable funds, then it is interesting to buy. If prices are high, you have to pay more to obtain the same units of income.

Let’s look at potential and actual supply and demand of incomes separately.

16.3.1. The demand for income⁶⁶

Potential demand of saver-capitalists is that part of income that is neither consumed nor invested (D = S – S_k), plus bank credits or new money created. Let’s stop here for a moment at this point in the reasoning process. New money should make interest decrease and should leave savings free. Savings would be totally free if the new money flowed towards speculative activities, making market prices rise and causing interest to drop. This does not happen because the financial market also grows in numbers and diversity.

Actual demand records the registered amount of purchases. In this way, if the amount of purchases of financial capitals, properties, etc. is 400 million, this will be the period actual demand. If 20 million in actual income is obtained through this placement, the percentage yield or interest is 5%. One can also say that the price of the unit of income is 20.

If you know the percentage yield or interest, it is possible to find out (as seen) the price of the unit of income and, knowing the disposable funds spent or actual demand, the number of units of income demanded will be precisely known.

The following original chart by Bernácer explains it:

Price of a unit of income	Profitability %	Amount of demand	Units of income demanded
5	20	500	100
10	10	420	42
15	6 2/3	345	23
20	5	300	15
25	4	250	10
30	3 1/3	210	7
35	2 6/7	175	5
40	2 1/2	120	3
45	2 2/9	90	2
50	2	50	1

The figures in the third column show the disposable funds spent (plus the bank loan), the incomes that have been bought or the demand for incomes. Dividing these by the price in the first column, the number of units of income earned is calculated.

The graph below shows the demand for income-yielding assets. The vertical axis shows the price scale per unit of income and the horizontal axes represent the corresponding size of the demand. The first graph represents the total amounts and the second graph, the scale, shows the units of income demanded.

The numeration and form of Bernácer’s example has been fully respected. The only difference, in the margin of the graph, is the vertical line parallel to the y-axis in graph a), which shows the corresponding interest. The magnitudes follow an inverse order (the interest and the price of income units). This may be confusing. Let me explain. If interest goes up (prices drop) then demand increases, but since interest is upside down on the graph, this means that demand increases when interest increases and decreases when interest decreases.

It seems like things are happening backwards: when interest goes up, demand decreases, as macroeconomic teachings state. This is easily explained if direct demand for units of income or financial assets is separated from the prior demand for money to demand these assets. They are two different operations.

The demand for money decreases when interest rises and increases when interest drops. After you have this demanded money and disposable funds, you go to the other market (not the money market) and these disposable funds and new money are exchanged for income-yielding assets. Here now, yes the price of these units decreases as the demand increases and vice-versa. Both demands, for money and for income-yielding assets, are normal and orthodox demand curves (descending with respect to price).

16.3.2. The supply of income

Supply is the value of the assets that are liable to be sold on the market. Since these assets generate income, potential supply is found in the units of income contained in sellable securities. With income (non-productive) established, as well as the quantity supplied, the percent profitability or interest rates are also established. Consequently, the price of the unit of income is also determined.

To Bernácer, the quantity of profitable assets is very large. This number is due to various causes. Financial assets are like the children of previous production, which also normally grow. Financial assets helped form investment in previous periods. Real assets constructed in the past continue being exchanged and with this, an endless number of title deeds. Financial markets make complex and varied combinations of documented transactions possible, which are then converted into securities. Keynes considered short-term debts as practically money.

However, to Bernácer they are definitely not money, but rather financial assets. Above all, the state is an enormous producer of securities. Bills, cash vouchers, short-term and long-term public debt are just a few examples. Normally, securities or financial assets tend to exceed potential demand. Even if they are all dumped onto the market, even if all the potential is translated into cash, their prices end up being low. This explains, according to Bernácer, that ‘in times of panic or great need of realising assets, the interest of money skyrockets to enormous rates’ (A Free Market Economy…, page 123).

If interest is low, the system may find issuing new securities of interest in order to collect financing. Interest being low does not mean that suppliers are necessarily interested in increasing financial assets. The opposite normally happens, or they withdraw. One thing is for entrepreneurs to turn to issuing financial assets stimulated by low interest, and another is the supply of securities from those who already own financial assets. Due to this, Bernácer said, potential supply is elastic in the sense of creating new securities.

Actual supply directly follows prices. It could be added that actual supplies, at each price, will follow an inverse road to that of demand. Actual supply will likewise approach potential supply, or the total securities available for sale. Bernácer said: ‘We can establish it, like demand, by the amount of sales and loans that the holders of liquid assets (disposable funds) want to execute at each price, or by the sum of income or interests that will be received for these quantities’ (A Free Market Economy…, page 123). In this line of reasoning dictated in 1955 or possibly earlier, there is nothing that differentiates it from the explanation given about speculation in 1916. The only difference is that Bernácer in 1916 was a provincial teacher and Bernácer in 1955 was a former director of the Research Service of the Bank of Spain who knew the Madrid Stock Exchange much better.

16.4. FInancial equilibrium or agreement

Demand and supply are elastic with respect to interest. This is logical. I believe the difference with Keynes is in supply, about which he is rigid. At the point where the suppliers of securities agree with the price and the quantity (one point) with their buyers, financial agreement takes place. This is the same as saying that equilibrium occurs when the suppliers of disposable funds coincide with the desires of buyers of disposable funds with respect to price and quantity.

With the price established, market interest is determined. At this interest rate, the suppliers of securities are willing to part with them and buyers to acquire them. The first receive disposable funds and the second deliver them. I repeat that the exchange of disposable funds for securities establishes the price of the securities and, from this, interest is determined.

Here is where some questions arise. Where are capital equipment, production, productivity and technological innovation to be found here? Or more simply, should the real economy be sought here?

The response is categorical. Nowhere. Interest is an event that is born outside of production and after it is established, it regulates, maliciously to be sure, the entry of capital into the system. Where is consumers’ sacrifice in saving to be found, if they can save without needing to make any sacrifice to feed disposable funds?

Disposable funds do not arise from any specific sacrifice or at least they don’t all come from sacrifice. One of the tributaries that carry disposable funds to the great river of total disposable funds is sacrifice. The great river of disposable funds flows into a channel, which is the desire to speculate and/or earn free income from the work of others. As mentioned earlier, the mere fact of receiving income by owning assets is already a speculative game between what is delivered and what will be received in the future via income.

A debate is being left open here. Few things are clearer in economic theory than the concepts of supply and demand. To Bernácer, one of the darkest areas of economic theory was the supply of and demand for money. He was referring to Keynes’ idea. In order for supply and demand to have meaning, an exchange ratio must be expressed. Money and shoes for example. Thus, whoever demands shoes supplies money, and whoever is selling the shoes demands money.

The financial market is a money market, but only partly, just like in any ordinary market. I am referring to the intermediate money market that is generated when financial assets are sold and bought (our assets), operations resolved with money.

On the financial market, demands are elastic depending on interest, given that interest is what attracts the disposable funds, which are simply money. Those supplying securities and other income-yielding assets demand money and those demanding these assets supply money. I think this point has been explained clearly. Interest wins over buyers and suppliers to exchange money and securities. Don’t confuse this demand with Keynes’ speculative demand, no matter how similar they may appear. They are alike in motivation, which is the desire to speculate. For Keynes, economic agents demand money to buy financial assets. This means that they demand to demand. They demand money to demand assets on the financial market. The demand for money operates on the money market, which moreover is neither the ordinary nor the financial markets, clearly.

Monetary supply satisfies this demand for money to speculate on the money market. Interest results from monetary supply and monetary demand. The question is very different from how Bernácer approached it. Let’s look at his criticisms of Keynes. He wrote that monetary supply and demand is an absurd operation if we do not say what these operations are done in exchange for (Metric Economics, art. 1955-56). He didn’t explain at all when speaking of demanding money what is being offered in exchange and, when speaking of supplying money, he didn’t say what was being received in exchange (what is being demanded in exchange). As Bernácer continued, if the buyers of securities supply money in exchange (disposable funds) and suppliers of securities demand money, then it is understood.

Thus explained, it is understood, and Keynes’ explanation remains in the darkness, no matter how much and how many wise economists have worked using and building upon the Keynesian proposition with mathematical and even conceptual elegance. He needed to search in the origin, in the concept itself of monetary supply and demand. Keynes’ mistake was an original error of classical economists who also frequently confused capital either with factors of production or with the monetary means that made the purchase possible.

Maybe Bernácer and I are being unfair to Keynes. Maybe I place too much attention on what modern macroeconomics says that Keynes said. I believe this injustice is caused because of modern macroeconomic education that may be poorly assimilated. I say poorly assimilated because there are issues like this, the money market, that I do not understand.

In reality, Keynes focused his attention on interest with respect to liquidity preference. The preference for liquidity means desiring and selecting money over other assets that are not money. Money is preferred due to the quick buying opportunities it provides. And money is preferred less and other assets are preferred more due to the possibility they have of providing interest or profitability. These other assets, financial ones here, are bought with money. This is money we have, otherwise we couldn’t buy anything. When purchases are made with money, liquidity is lost and profitability is gained. Having liquidity has its advantages, which is taking advantage of good opportunities, opportunities that are speculative. Although not totally clear to Bernácer, he explained it and his explanation is so simple and clear that many have been dumbfounded.

Liquidity preference hides the old concepts of supply and demand, he stated, just that they are supply and demand on our financial market. The explanation is as follows: whoever renounces liquidity parts with money and acquires something. Except for madmen –and not all of them but a few– if you have given money to someone, it is because you have bought something. Renouncing liquidity is to buy or demand. Whoever wants more liquidity or money executes operations for supplying it. This operation is called supply of assets to get money in exchange. This is how the greater or lesser liquidity preference was explained as the supply and demand for assets.

Of course, liquidity preference does not only relate to the greater preference for ready cash. It is related to this desire with respect to the interest provided by other financial assets. Therefore, liquidity preference is a greater or lesser desire for money and a greater or lesser demand for money on the speculative market. This clarification is important whenever the liquidity preference also increases and decreases due to the supply and demand of goods and services.

In short, speculative supply and demand are direct for Bernácer. In the financial arena, suppliers and buyers of securities and other assets come together. In Keynes’ work, the operation is indirect since those demanding securities have first gone to another arena, the monetary one, to demand money, and after they get it, they then go to the financial market.

Liquidity preference entails the operations of buying and selling financial assets to have more or less liquidity, as one wishes. Of course you can lose liquidity by buying a piano and increase it by selling a lamp, but since the financial market is being dealt with here, financial assets are the product in question. So much unnecessary complication for something that was already known, stated Bernácer.

16.4.1. The one and only multifaceted financial market⁶⁷

Financial market assets are characterised by several properties. The first is that they are not new wealth and thus do not generate new income. For example, a plot of land. Secondly, they generate non-productive income R (different than national income) simply by owning them. This is not a necessary trait of these assets, since there are assets that can generate maintenance costs, taxes, etc., even losses. They are continually exchanged, awaiting speculative earnings through changes in market prices. This can be a material thing or merely a debt instrument or legal value.

Opposite this market is the ordinary market, from which national product comes. This product includes thousands of different products that are specifically supplied and demanded. In other words, each one has its market. They are specific markets within the large ordinary market. Specific needs and specific income leads each buyer to request his product.

Why am I repeating such obvious statements about the ordinary market? To better explain the financial market. Very different financial products are offered on this market. Each one has a specific range of profitability, risk, liquidity, security, etc. These characteristics shape a clear profile that makes each of these financial assets different from the rest. And clearly, there are suppliers and buyers like on any market. Therefore, there are specific and numerous markets for each financial product within the overall financial market.

Each economic unit wants to keep assets for different reasons and for a mixture of different reasons. Some people want to place their savings simply to speculate and consume more tomorrow; others, like an employee waiting to retire, wants to keep his savings to use them to plan for possible contingencies tomorrow and if he happens to obtain a profit, all the better. Companies place their sinking funds into assets that earn profitability and, in turn, keep some liquidity to cope with production needs tomorrow; others acquire assets from the public sector (passive in this sector) as tax deductions. Other investors wish to place money to hide money from the Treasury; others for land speculation, for example, so that even if they are very profitable and safe, they are quite illiquid; others seek liquidity and subsequent low profitability. The examples multiply, adjusted in each case to investors’ needs. What is clear is how difficult it is to separate one motivation from another and even more difficult, if not impossible, to segregate one group of speculative investors from another group of cautious investors and others who are somewhere in between.

In the same way as there are different needs and therefore different financial investors (although I believe using the word ‘investor’ here is incorrect), in the same way I repeat, there are financial assets to satisfy all these needs. The ordinary and financial system is particularly prolific to be able to engender an entire series of financial assets. Banks, non-banking financial intermediaries, companies, domestic economies and, above all, the state are continually creating financial assets, each one with a different maturity date, profitability, risk, liquidity level and security.

This variety is necessary to meet the needs of each specific investor. So there are bills, cash vouchers, promissory notes, bonds, short and long-term public debt, Treasury bills, Treasury bonds, as well as properties, plots of land, buildings and even properties, plots of land and buildings that have never existed. Some are very profitable, some are profitable but are subject to large oscillations in their value, others have quick maturities, others longer, others are used as money, others are comfortably in the bank and in others, the discount is quick but costly, etc.

The fact is, like all demand, the buyer carries a mental plan in his head that aims at satisfying a need (speculative, cautionary, etc.) and, supply that in itself is a plan, which is to demand money. The agreement between supply and demand is realised in each specific market, where the sum of all these markets is the financial market.

Private and governmental financial organisation tends to unify markets and, in turn, tend to specialise them. In this way, every person finds his supplier and every person their buyer. The most organised market is the stock market, a giant exchange on which information and transaction speed gives it crystalline transparency. Indeed, the passage of time has strengthened Bernácer’s affirmations. The multiple and diverse financial operations, the multiple assets that appear on the market exhausting financiers’ imaginations, the flexibility of the law that makes new varieties of contracts possible… all of this joined to the democratisation of economic information and the humungous capacity of computers have only served to confirm Bernácer’s statements.

Opposite the complex psychology of buyers who carry the combination of multiple desires in their plans is the simple and clear desire of suppliers who want money. Simply money or, if you like, disposable funds.

There is another difference between the ordinary and financial markets. On the ordinary market, in each one of these markets, each buyer clearly knows what he wants. A car with specific characteristics, a refreshing drink or the services of an employment lawyer, for example.

Not even a fortune teller could understand what a speculative investor has in his head. Nobody could answer (not even the buyer) what the reason is that leads him to buy state securities or shares. Profitability, liquidity, security, etc.? What people can do is find out about general tendencies. Sinking funds require specific financial investments, a speculative fund, another type of investment. But there is no clear and defining separation.

If they are compared, the suppliers on the ordinary and financial markets are both demanding money.

16.5. Disposable funds or financial capital and actual capital

All explanations seem insufficient to determine Bernácer’s outlines at the beginning of the century. The explanation was terminological and conceptual. Let’s go back to the idea of capital.

Capital in one of its meanings is a product of work; in the other, it is the product that, above all for classical economists, was money that demanded capital goods. A serious confusion, when the most classical of all classical economists, whom I believe to be David Ricardo, knew what capital was as a factor of production, as well as his marginal student, Carl Marx.

In one of its meanings, capital is the product of labour and, in the other, it is the product of savings. I believe that Bernácer settled the matter when he differentiated capital from savings. With this qualification it demands and finances the first, an operation that we already know is called investment⁶⁸.

Since we are interested in the interrelation between financial and real markets, I will explain what I understand by the poorly-named capital market. This is the market of funds that lets the authentic capital market be financed. These funds are system savings.

The last section finished stating that the ordinary and financial markets are similar in the sense that suppliers from both markets demand money.

Let’s see what suppliers on the financial market, or disposable fund market or the misnamed capital market offer in exchange.

1) Stock-market share sellers

2) Property sellers

3) Loan seekers

4) Those who issue securities or financial assets (with their liabilities) to finance their industrial capitals

Dynamic portfolio equilibrium

Connected to the previous question, we will analyse how disposable funds are placed, with truly diverse origins, among different assets, in accordance with profitability-risk criteria. The explanation Bernácer gave is simple and is related to the theory on portfolio equilibrium presented in modern times by Tobin, although not with the polish and strictness given by this commendable Nobel Prize winner.

Liquidity and profitability are combined in financial assets. It is liquidity preference. Dynamic equilibrium is also sought between profitability and risk. In the great economic game, investor-players bet on securities that will be more profitable, although they are also riskier. Nobody acquires a high-risk security if another can be acquired with less risk and the same profitability. It everything turns out well, they will have obtained large profitability as a prize, otherwise a loss. In securities and shares, the risks are not equal. A new issuance will have greater risk than a guaranteed state issuance. If risks are different, marginal profitability or interest is also different. Thus, fund providers or lenders will receive interest that is not equal, albeit comparable.

An example can be used to better understand this. A moneylender-saver, or fund provider, has two options. One is to buy government bonds and the other is to buy private securities. The first has a yield of 11% and the second of 15%. The saver believes that the 4-point difference (15% – 11 %) is small to compensate for the risk. He thinks that he would invest in private funds if they yielded 19% instead of 15%. While this does not happen, he will demand public funds, not very profitable but very safe. This activity will contribute to raising market prices and decreasing relative interest. Simultaneously, it will contribute to improving the conditions of private company supply to attract suspicious investors.

Old private securities could be substituted for public funds in this example because their risk is known and have decreased because the market, after working with them for some time, has contributed to maintaining uniform market price levels. If the new conditions of the new securities do become attractive, funds will demand them and the market prices of the old ones will drop.

Fund buyers thus keep a portfolio of financial and real assets (our financial market) with different assets by order of liquidity, risk and profitability. Among these assets is money itself. Opposite this demand, there is a dynamic movement of supply that will continually and obligatorily offer different assets in order to attract funds. Thus, there will be a tendency towards equilibrium in the sellers’ asset portfolios, on the one hand, and suppliers on the other, and the market in general. Here, Bernácer repeated his old argument from 1925 (The Interest of…) and in his last book from 1955 (A Free Market Economy… ).

I think it is somewhat similar to the money market and asset equilibrium explained in modern macroeconomic books, when they refer to the LM curve, whose origin dates back to Hick’s work on the Keynesian model (IS-LM curves).

With new issuances, which are rivals of old issuances, entrepreneurs collect funds that are savings and acquire capital goods. This means that they invest.

If savings is occupied with acquiring old securities, savings is squandered but does not finance new investments. This is a dangerous operation.

The new issuances reward lenders with the profitability obtained from their investments, restating this with more certain words, the last saver is paid with the marginal productivity of capital. What is tragic about this case is that the new emissions have a rival in the old ones, which provide merely monetary profitability and do not generate new production.

Old issuances live on the financial market. Their life is possible due to the disposable funds that arrive there from non-capitalised savings. Since these old issuances do not generate much interest, although it is free, interest born on the financial market impedes the free transit of savings to investment. New emissions are born on the ordinary market, in the same way that investment and production spring from this market, but since they survive after this honest function, they then become old securities.

If the profitability of capital goods was not high nor the profitability paid to lenders who acquire the new issuances, even so, savings will run quietly towards investment, but financial market interest will warn this lender of the foolishness of this activity when, risk free, it can obtain profit from the old securities.

Old securities and other assets reflecting financial market operations are heirs of productive operations on the ordinary market. But they are unnecessary parasites that rob the food (disposable funds) from their parents. To Bernácer they are patricidal sons.

This is why I have stated that the financial market is heir to the ordinary production market. Like the banking system in its transferring task of taking savings to investment, it also creates money, and the economic system has an auxiliary power that feeds investment. Nonetheless, the quantitative and varied growth of the financial market means this aid is partly neutralised, partly because a fraction of the money created detours towards speculative demand and partly because the same savings, or investment, is not dumped back into the productive, but the financial market. Thank the lord it is only a part. The following graph tries to depict these words.

Savings S goes partly to banks S_k, which transfer it to investment in lending transactions I. Money is simultaneously created (Δ money). Part of this created money goes to investment and part to the financial market. Savings that are not invested are disposable funds (S – S_k = D), which also feed the financial market.

The arithmetic formula can be expressed as follows: If the new money created is M, the part of M that goes to finance investment will be called M_k and the part that finances the financial market will be M_f.

M → M_k and M_f

Investment will be equal to:

S_k + M_k =I

It is the savings that are capitalised S_k = (S – D) plus the new money that finances the investment.

The flow that finances the financial market will be equal to:

D + M_f = Flow from the financial market

Note: The formula was not explicitly drawn up by Bernácer. And this is my graphic interpretation of his verbal explanation.

16.6. The capital goods market

Capital, like consumer goods, is the fruit of human activity. It is created with the labour factor and other factors of production. Capital aids production in the production task. In market terms, its value like any consumer good is a reflection of its supply and demand. If demand is low, it accrues unsold and forces prices to decrease. They tend to say that interest is paid for scarcity. False. Interest is not paid for capital. Whoever buys it, buys it for its sales price and nothing more. Another thing is that this calculation is complemented with the chain of estimated returns.

Interest is paid for the liquid asset that is done through a loan to finance capital goods. And interest is paid on all loans, independently of the end for which the loan is intended. Like all prices, interest reflects tension between what is wanted and what there is or, the same, between supply and demand.

Interest is paid for the liquid asset (savings plus new money lent) because it is scarce in some way. If it were abundant, enough to widely attend any request for monetary resources, interest would be null.

This is how certain production activities, which endure greater risk, are undertaken by only a few plucky entrepreneurs, who then receive a higher percent of profits. It is the other back room of the market, what is done with loans that are requested. With the money from these loans, entrepreneurs invest in these scarce activities that are subject to uncertainty. The prize is the profit. I believe this is Knight’s theory.

The arguments that tend to be dumped on capital and interest are diverse and colourful. They are apparently so logical that students and researchers alike cruise along them like a well-lit street. They err, because there are two roads. Let’s look at an example: They say that interest is paid as recompense for the aid to production that is capital.

The correct argument is: Assistance to production is determined by capital as an intellectual and physical element, the fruit of work and human cleverness. Conversely, interest is the price paid for ‘the two moneys’ (savings and new money) that has let capital goods be financed.

Since savings and new money detour to the financial market, where they generate interest, interest emanates outside of production. As an element that is outside of production tasks, and in some way outside of monetary ones as well, it is wrong to say that it is compensation for capital equipment.

Interest signals the price of money and in this way lets investments be evaluated in terms of the cost of opportunity. This is how capital equipment has the cost of interest behind its back, which the financial market carries on its own back, and not because it is part of its body.

It is very possible that, although the financial market is comprised of few disposable funds (a fraction of savings) and little new money, even then interest is high. The explanation lies precisely in the impetus of a dynamic economy to increase its production capacity. It is ironic that this yearning to grow places limitations on growth, since higher demand for a supply of resources, owing to capital needs, makes interest go up and contain production.

If the opposite happens, the operation also becomes dangerous. If a large quantity of money goes to the financial market, the market price for securities goes up, making interest drop, a drop that is healthy for investment. Nonetheless, there is a disadvantage. Interest has dropped because the financial market has been flooded with money, which has moved out of the ordinary market. However, it is the ordinary market that requires this money to invest, produce and distribute income.

I must repeat this point. The difference between investment and the placement of resources on the financial market is not only that one increases the productive capacity of the economic system and the other does not. The most important difference is that investment returns all money (savings plus new money) to the ordinary market and the second takes it but does not necessarily return it.

16.6.1. Conditions for the existence of zero interest⁶⁹

Here is an intelligent exposition by Bernácer for the understanding of interest and the financial and ordinary markets. The financial market is characterised by its fecundity. It grows by itself and, above all, as mentioned several times, from the production of the ordinary market. Production activity is born there, reclaiming financing sources via the issuance of securities. As time passes, new titles appear, which are added to those that before were new and now are old. Multiple legal relationships are also generated in the system, reflecting documented creditor-debtor relations, documents that are the object of speculation. Real speculative assets are added to this market.

In order for interest to be null or tend towards zero, the condition must be met that given income (non-productive) R, the corresponding market price for these assets must be infinite.

R / ΔV → Δi > O

Here, as always, V is the value of all financial assets and i interest. Infinity does not exist in economics and even less so on the financial market. No matter how much savings and new money it absorbs, no matter how much security prices drop, the number of securities is always growing, which is at least an intense indigenous growth. V will never be infinite. However it is at least theoretically possible that profitability of a production activity is equal to zero. And, if interest, born outside of production as we know, is always positive, it forces invested capitals to yield positive profitability that is greater than interest. But if industry profitability were reduced, even in the impossible case of null interest (i = 0), this does not mean that it isn’t socially and economically interesting, since it always shows an increase in production capacity of the economic system.

Returning to the previous argument: an increase in the market price of securities and other financial assets, including real ones, so that the increase is infinite (i = 0), this apparently positive dynamic would mean collapse in the ordinary market. The reason is obvious, since a giant leap in market prices of securities is only possible by absorbing humungous quantities of disposable funds, also infinite, which would mean the quick death of the ordinary market, which is where these flows would come from.

For a rigorous explanation of the previous argument, Bernácer carries out the following experiment.

Financial market supplies and demands can be divided into three groups:

1) Fixed asset securities

2) Variable asset securities

3) New securities and loans

The existence of positive interest requires that at least one of these placements originally generates income (non-productive).

If new securities and new loans disappear, resources would go to old ones, which used to be new, and that continue to circulate. This would contribute to making market prices rise and interest drop.

You can imagine that the sector or group of variable-income securities stops operating, in which case demand would be channelled towards fixed income and new loans. In this last group, buyers would try to obtain it under the most advantageous conditions, but if they weren’t so advantageous, they would demand the old securities, making market prices rise and interest drop. Those requesting loans, companies or investing units, would pay this interest at least if they wanted to compete in attracting loans.

If the variable-income sector were eliminated and the new loan sector suppressed, all funds free of the market would turn to demanding from the fixed-income security and property market, raising the market price of the income units placed there. Here is the centre of the argument: all disposable funds and new money would demand these old fixed-income securities, making the market price go up, with which the percent return, or interest (R/V) would drop. How much would the denominator or security price have to increase so that interest (or fraction) was equal to zero? It would have to increase to infinity, which is unthinkable. More precisely, even if it were somehow to occur, it could never be negative.

Lastly, suppose that the fixed income and property market were eliminated. Before continuing, remember that this market is the most important as regards the volume of transactions. Therefore, monetary resources would go to other groups (in prodigious amounts), raising market prices. A speculative process would be started up by agents seeking quick returns. After the process stopped and speculative earnings eliminated, the yield rate (percentage) would be reduced. New buyers would be able to obtain loans at lower levels. Companies that were paying back loans at extremely high interest rates would renew their old loans for new ones at lower rates. Likewise, new companies would find their investments were cheaper. What would be the only way to eliminate interest? By suppressing the market that originates them, or the financial market. If for example, the variable income and debt and property (fixed income) sectors were simultaneously eliminated, available savings would have no choice but to go to investments in fixed capitals. This is the same as saying that savings would be dumped into the only market that wasn’t cancelled (in this last example), which is the new loans market, which is limited. Perhaps the most limited of them all. If all savings moves towards this market, the considerable flood of the supply of savings, before occupied in the now-suppressed markets, would turn to the investment market, making the price of money drop to null.

And interest would tend to move towards zero for the simple reason that new loans documented in securities would not be negotiable, still with respect to the example. Savings would not find a free and lucrative placement on the financial market and, therefore, the only possibility would be to move towards whoever requested it. The parties requesting it would be those demanding new loans for investments. In this way, savings that exited the ordinary market in the process of creating national product would return to it, via the financial operation entailed by lenders lending to borrowers, moneylenders who are savers and borrowers who are the investors. Savings will now have the inevitable calling towards capitalisation.

If there are no financial assets, there will be no income (R) derived from its free possession, nor quotes on securities and therefore it would be absurd to speak of profit percentages of income and assets that do not exist. Interest would no longer exist. If interest stopped existing, there would be no reason for investments to be limited in their free application.

Note: I believe that Bernácer did not see the flip side of the issue, which is the existence of a money market on the ordinary market, even if the financial market did not exist. There is a savings supply flow and a demand for savings, thus interest arises, which would be different from financial interest.

In the last example set forth by Bernácer, current savings is aided by savings on the financial market and, upon eliminating this market; it would be added to the ordinary market. Under these conditions, interest would be zero or move towards zero. If just considering current savings, it would be difficult to establish the conditions under which monetary interest from the ordinary market would tend to be zero. A sudden demand for money to carry out new and stimulating production activities could always make loans expensive, making interest rates go up.

My argument –not Bernácer’s– is corroborated by the last statement, saying that savings must finance fixed capital and new money must finance working capital so that the system does not become depressed. This proves that savings is insufficient to develop production activities. If there is not enough savings, it means it is scarce and if it is scarce, proof being that new money is required, there will be a price for it, which is interest.

Therefore, the conclusion is that for interest to be zero, in the absence of the financial market, monetary demand for working capital must be financed with new money.

16.6.2. The issue of net disposable funds

One adjective, net, is so necessary to explain the financial market that the theory I am going to explain could not be shown without its assistance

A person has placed his disposable funds on the secondary financial market, instead of acquiring new shares that would have entailed the capitalisation of his savings. He has bought, for example, bonds, which represents sales for the person who has them. Then D’ disposable funds will have entered the financial market; an operation that will have no importance if the seller of the bonds takes these disposable funds and buys a car. If this operation took place, nothing important has happened, given that the only thing to happen is that the ordinary market has moved its money from the left pocket to the right. The disposable funds Mr Smith had that were moved from the ordinary to the financial market, return almost instantaneously to the ordinary market when Mr Jones buys his car with the disposable funds received by selling his bonds. Furthermore, the operation is healthy, since the initial disposable funds, D’, that grew due to the absence of spending –on consumer or capital goods– now represents spending on the ordinary market.

The example is similar to a glass of water, which is our financial market. If the glass is full and you add a few more drops of water, the glass will overflow and fall onto the saucer, which is the financial market. The water will be savings and disposable funds. This is the macroeconomic philosophy or point of view. In macroeconomics, the financial system is simply a bridge between savings and investment. Something like the arteries that carry food to the body and in which, the blood cells represent financial assets.

The net flows of the input and output of disposable funds are what are important here. This means that if more flows of disposable funds enter the financial market than exit, then the financial market will be abundant with funds. Conversely if more exit than enter, the ordinary market will have unexpected resources even without the creation of new money and the generation of new savings. The difference between the disposable funds that enter and those that exit the financial market will be called the flow of net disposable funds, which are the most important for explaining crisis.

The entry of disposable funds will be designated as →D_i and the exit of disposable funds as ←D_o and net disposable funds by D_n. In the viewpoint of the financial market, the following will take place:

These operations correctly explain not only the circular (or elliptical) flow of income, but provide an element of common sense that will let the processes be analysed that generate economic cycles. The next section of this work deals with cycles and this extremely important economic dynamic will appear again. Therefore, I must state that the flow and return of these disposable funds entails injections of monetary supply at times and an escape at other times, disorienting to monetary authorities, making them useless when trying to control monetary supply.

It is like a house that is flooded with water without having noticed any leak in the pipes and then, when you turn on the tap at another time, there is no water or it ebbs and flows.

Alternations in liquidity preferences will explain these arrhythmic tides in monetary resources. But I cannot continue with my explanation because the wise Keynes did not see the obvious (perhaps he didn’t know how to interpret the blatant messages coming from the illuminating Mediterranean sun) and what is blatant is that the different assets preferred over money cannot be mixed with it, since these assets are on the financial market. These are bought with money and they are sold in exchange for money. They cannot be linked together with the series of money or moneys, which they essentially are not, although they can be converted into money, or liquefiable financial assets. And they cannot be linked because one is outside of the shop display case, the buyer with money, and the other is inside, the seller of financial assets. Thus, the ebb and flow of disposable funds that, like nervous guests, enter and leave the financial market are nothing but reflections of the tensions derived from the liquidity preference.

This is a simple way of seeing things that are uselessly complicated by others.

And net disposable funds will rear their heads again in the explanation of economic crises.