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Own Rates of Interest

  • John Eatwell
Part of the The New Palgrave book series (NPA)

Abstract

The concept of the own-rate of interest on a commodity was introduced (though not named) by Piero Sraffa in his review (1932) of Friedrich von Hayek’s book Prices and Production (1931), and was later taken up, and labelled, by Maynard Keynes in his analysis of the role of money in the theory of employment (1936, ch. 17). Sraffa introduced the concept by means of the example of a cotton spinner who borrows money to purchase a quantity of raw cotton today (at the spot price) which he simultaneously sells forward (Sraffa, 1932, p. 50). The spinner is actually borrowing cotton for the period of the transaction, say, one year. The own-rate of interest on cotton is then the spot price of a bale of cotton divided by the future price of a bale discounted at the going money rate of interest; less one. So if the price of 100 bales of cotton for delivery today is $20, and the price to be paid for delivery of 100 bales in one year’s time is $21.40, whilst the money rate of interest is 5%, then the own-rate of interest on cotton is
$$\frac{{20}}{{21.40/1.05}} - 1 = c. - 2\% (See\,Keynes,\,1930,p.223).$$
Sraffa’s interpretation of the role of the money rate of interest in the calculation was not that it was simply the rate of interest on a numeraire. ‘Money’ in his discussion, is the actual financial medium. So the money rate represents the normal rate of interest (which is assumed equal to rate of profit) in the economy as a whole. The difference between the money rate and own-rate of interest on a commodity therefore indicates that the spot market for that commodity is not in normal long-run equilibrium.

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Bibliography

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Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1989

Authors and Affiliations

  • John Eatwell

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