by G. Stolyarov II

Created on: December 31, 2006   Last Updated: May 08, 2007

The Austrian School of Economics analyzes four distinct economic functions: those of laborers, owners of "land" (productive natural resources), capitalists, and entrepreneurs. Though unrealistic and in part contradictory, the model of the evenly rotating economy (ERE) allows the Austrian economist to accurately analyze in isolation the sources of income derived from each economic function. Using the ERE, one can examine the root of wages for labor, rental payments to owners of factors of production, and interest payments to capitalists. One can also distinguish the nature of entrepreneurial profit from the three aforementioned types of income by understanding why the ERE lacks opportunities to earn said profit.

In the evenly rotating economy, income payments (wages) to laborers are determined by the discounted marginal revenue product (DMRP) of the service that the laborers provide. The DMRP of labor is the marginal utility of a given unit of the service in question. It equals the revenue which this specific unit of the service provides, i.e., the discounted value of the subjective satisfactions the worker creates via the unit of service.

The rental payments to machine owners in the ERE are determined by the productivity of their machines. That is, in the ERE, the rental payment gained by the machine owner in a given time period will precisely equal the value of the goods the machine produces during that period.

A capitalist in the ERE will earn interest on the basis of saving and accumulating capital goods that can produce consumer goods in the future. The capitalist will advance these capital goods to owners of land and labor, the other factors of production, in return for the future yield of those factors. Over time, the future consumer goods attainable via the capital goods are produced and turn into present goods. Because the capitalist postponed present consumption to purchase capital goods which eventually yielded more consumer goods than existed before, he earns interest equal to his rate of time preference: his willingness to delay present satisfactions in return for a greater number of future ones.

Two measurements of a capitalist's interest income are gross return and net return. The gross return equals the overall income from the capital good, including its interest income and revenue from productivity. The calculation of gross return does not take into account the expenses the capitalist accrued in making his investment. Net return, however, equals

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