Frank Fetter was the great American Austrian who devoted a fantastic part of his professional life to arguing on behalf of the pure time preference theory of interest. His work is lucid and powerful, and largely would have been forgotten if Murray Rothbard had not assembled this excellent volume of his writings. It supports the Misesian case in every detail, and set it against the productivity theory and other false notions of interest.
Capital, Interest, and Rent is now available for free download or print on demand.
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If only they taught this in school, people would not be so lossed when it comes to money matters. The basic premise is fairly simple. The problem now is that most people just quote Federal Reserve press releases when discussing about economic issues, even the so called economic experts.
Talk about lost. A distinguished analyst lays it on the line:
http://www.bullnotbull.com/archive/harry-2-2007.html
In a free market, interest rates are derived from (1) the time preference for money and (2) the risk involved in the loan, no?
Interest rates are the result of the owner’s willingness to part with his money, balanced by the recipient’s demand for money. The more likely the loan is to default, the higher the rate is.
I would agree, Nick, but it’s important to note that the market rate is an overall factor of the economy, while the premium based on risk factors is much more dependent upon the individual borrowers and loaners, and thus has no set or standard rate.
I believe that when Mises, Fetter, and Rothbard refer to “interest” they are attempting to explain what Mises termed “originary” interest, which is solely determined by time preference, i.e., the higher valuation of present goods compared to future goods. Or in Mises own words from “Human Actionâ€:
“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself.â€
Market rates of interest, which apply to specific credit transactions and which in economies characterized by indirect exchange are necessarily expressed in terms of money, can include an allowance for the risk estimated to be associated with the credit transaction.
I’m rereading Mises’s Human Action, and he has a throwaway commment on how Bohm-Bawerk proved the pure time-preference theory of interest… but having read BB’s Capital and Interest, I still see some ambiguity with regards to the marginal productivity of capital. Rothbard states that the orignary interest is solely derived from time-preference… so where does the marginal productivity of capital come into play? Would that also be one of the “additional factors” in going from originary interest to “market” interest?
Michael,
My understanding is that Bohm-Bawerk, in “Capital and Interest” completely disproved, demolished the productivity theory of interest. But later in the same work, in addition to explaining (originary) interest with time preference, he also, inconsistently, used the productivity theory.
It remained for Fetter and Mises to consistently explain (originary) interest solely utilizing time preference.
http://video.google.com/videoplay?docid=-9050474362583451279
youtube ‘where money comes from’
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