The effects of the inflationary boom are not distributed evenly across the economy. In particular, the boom exaggerates the funds allocated to higher-order factors, which are separated by a greater length of time from the final consumers' product. Suppose, for instance, that for a particular type of labor X, one incremental hour adds $15 in market value to the quantity of the final consumer product G. The period of production for this labor is one year: that is, the labor must be expended one year before G is obtained. Let us suppose further that the natural interest rate, determined by the value scales of market participants, is 10%, and that this rate is reduced to 5% by the inflationary intervention. (For simplicity we assume that risk is minimal and will not affect our calculations.)
The free-market wage for X, of course, tends toward its DMVP. The computation of the DMVP (cf. pp. 4.8:11-6)
includes a division by 1.1, reflecting the 10% interest discount over a period of one year:
free-market DMVP of X = $15 / 1.1 = $13.64
The DMVP of X under inflation is based on an interest rate of only 5%:
inflationary DMVP of X = $15 / 1.05 = $14.29