Keynes’s user cost and its implication for the real rate of interest[Fixed Capital and Inflation: An Analysis of Applying Keynes’s Notion of User Cost’]

Keynes’s user cost in the General Theory is a two-dimensional concept. While its role as a national income accounting device to avoid double counting has arguably been subsumed under the current national income accounting practices, its significance in the context of the theory of value, specifically how user cost links the current prices of goods and services with their expected future prices, may not have been fully appreciated. This paper elaborates and develops the measurement of user cost along the lines indicated by Keynes and shows that user cost is an expectation-dependent component of prime cost that constitutes the conduit for future price expectations to feed into the current prices. It is argued that user cost plays the role of anchoring the current prices of goods and services to their expected future prices and that this has an implication that raises a serious question about the theoretical usefulness of the real rate of interest as an ex ante concept.