Time Preference and Interest

Week 7 of the Mises Institute’s Home Study Course in Austrian Economics includes one audio lecture and three book chapters dealing with time preference and interest.

1. “Time Preference and Interest” by Jeffrey Herbener: This lecture has a good summary of Ludwig von Mises’s rebuttals to the detractors of the idea of time preference, supplemented by Herbener’s own illustrations of objections he has encountered in his university classes. I also like the illustration here of how originary interest comprises part of the entrepreneur’s gross profit.
2. “Frank A. Fetter: Forgotten Giant” by Jeffrey Herbener (Ch. 9 of Randall Holcombe, ed., Fifteen Great Austrian Economists): Before reading this chapter, I knew practically nothing about Frank Fetter, having never read any of his work. He wrote a treatise in 1904 demonstrating that time preference is the source of interest rates, not the productivity of capital. Herbener writes that Fetter’s work on capital and interest as never been surpassed. A couple of other things jumped out at me here. First, Fetter understood that man’s wants are not limited to narrow self-interest or material desires, but include social and spiritual desires as well, and that economics can say something about that. Second, Fetter understood that labor, like capital, is a heterogeneous resource; men differ in their capacities, and we should expect differing degrees of success having nothing to do with exploitation among workers. This probably isn’t news to anyone today, but plenty of 19th- and early 20th-centuries socialists disagreed.
3. “As Time Goes By: On the Factor of Time in Human Action” (Ch. 3 of Gene Callahan, Economics for Real People): I really liked a couple of paragraphs in this chapter where Callahan rhetorically asks why, if everyone knows that savings is the road to wealth, people don’t live at a bare subsistence level in order to maximize savings. He answers his own question this way: “There would be something very curious about a world in which people worked hard so that they could save for future consumption–yet never engaged in that future consumption, because when that future arrived, they were saving for consumption in an even more remote future.” We consume to alleviate present dissatisfaction, but that’s also why we save; anticipation of future dissatisfaction is also a source of present dissatisfaction.
4. “Production in an Evenly Rotating Economy” (Ch. 6 of Thomas Taylor, An Introduction to Austrian Economics): The evenly rotating economy is an imaginary construct where there is no change in technology, resources, or preferences over time. Taylor shows that such a scenario, there would be no entrepreneurial profit, only profit deriving from interest. Capital goods would command equal prices across all possible lines of employment, and “the price of each product would (except for the interest factor)equal the summation of the marginal value products of its complementary factors of production.” Interest rates would also be uniform throughout the economy.

Allow me to remind you that Dr. Herbener teaches Austrian economics at Liberty Classroom. Please join the party over there!