15 May 2021

New Developments in Austrian Interest Theory

Bob Murphy Show, Capital & Interest 25 Comments

Bob Murphy Show ep. 198 is a guest lecture I gave to Jonathan Newman’s online Master’s class for the Mises Institute. I set the historical table for BMS ep. 199, in which I talked with Jeff Herbener about his recent presentation at an Austrian conference on the pure time preference theory of interest. It was very surprising for me, because Jeff was much closer to my position than I expected, going into the discussion.

Audio for BMS ep 198 here, video below (with PowerPoint):

And then the audio for BMS ep 199 here, with video below:

25 Responses to “New Developments in Austrian Interest Theory”

  1. Transformer says:


  2. Transformer says:


    I found the discussion between Bob and Jeff Herbener fascinating. I had never noticed before looking at Bob’s thesis that the mere existence of a positive time preference for present over future utility is not a sufficient condition for positive interest rates!

    If I understand Bob’s theory correctly he is suggesting that one need make no assumptions about TP (for either goods or utility) to derive a market interest rate. This money rate of interest will likely be positive simply because it is always better to obtain money (a non-perishable good) sooner than later because it is clearly better to get the services money brings as early as possible. Once the money rate is established it will presumably drive the structure of production in the economy.

    I can see the attraction of Bob’s theory in terms of side-stepping a number of complexities. However I can’t quite get my head around it but it feels like without assuming time preference on utility it will be impossible to fully explain the structure of production. I certainly think that is the case in a non-market economy. Say that Jane Crusoe, alone on an island, has a long list of possible production techniques available to her of varying degrees of roundabout-ness. She is able to rank them in terms of present utility by (implicitly) using a discount for future over present utility. She will then employ those processes that yield the highest present utility. Without her having some positive TP on utility I fail to see how this would work – she would end up with unrealistically high levels of roundabout-ness.

    The difference between a market and a non-market economy is really just that the former opens up new utility maximizing opportunities through specializations and trade so intuitively it feels unlikely that the fact that a market economy allows an interest rate on money to emerge will fundamentally change the role that TP plays in driving the structure of production.

    Anyway, I’m still thinking it through – welcome any thoughts.

    • guest says:

      “This money rate of interest will likely be positive simply because it is always better to obtain money (a non-perishable good) sooner than later because it is clearly better to get the services money brings as early as possible.”

      That *is* positive time preference. You’ve just proven that interest can, in fact, come solely from positive time preference.

      (FWIW, Bob would disagree.)

      • Rob Read says:

        Yes, that positive time preference on money. I understand Bob to be distinguishing that from positive time preference on other goods and on utility

        • Transformer says:

          I see now why a move to a market economy changes the role of time preference.

          In a non-market economy each person builds their capital structure based purely on their own TP (for utility). They will add roundabout processes until the marginal process adds just enough utility that its discounted value is just greater than the best available non-roundabout process (or leisure).

          In a market economy the availability of a loan market will enable people whose TP is greater than the interest rate on money to borrow to profitably invest in more roundabout-ness, while those whose TP is lower than can reduce their roundabout-ness as they can earn a better return ion the loan market.

          The net result will be a homogenizing of roundabout-ness across all lines of production.

        • guest says:

          ” I understand Bob to be distinguishing that from positive time preference on other goods and on utility”

          OK, but the reason money is valuable is because it buys goods, so money is only valuable *as* a proxy *for* goods (and services, of course).

          So, it’s the same as barter, just indirectly so.

          Which is why the money has to have a link to use-value in order to convey subjective values (other than purely speculative values, which is what a Ponzi scheme does).

          • Transformer says:

            I think Bob is saying that money has special (liquidity) functions that mean unlike goods (where negative TP is possible) and utility (where even positive TP doesn’t guarantee a positive interest rate on goods) TP on money is always positive so the money rate of interest will also always be positive.

            • guest says:

              “… special (liquidity) functions that mean unlike goods (where negative TP is possible) and utility (where even positive TP doesn’t guarantee a positive interest rate on goods) …”

              I’ve read the part of Bob’s dissertation explaining why he believes this is so, but I submit that he misunderstands what “TP is always positive” is really saying.

              First of all the nominal rate doesn’t matter, so long as acting man believes he will be better off in the future for having chosen a lower nominal rate than he could.

              Second (and probably the more important point), Bob frames the issue incorrectly when he has acting man choosing between options available at T1 (time period 1) as against T2.

              Except that acting man *always* makes decisions based on T1.

              There is no T2 for action, there is only *current* (T1) expectation of what will happen in T2 if he takes one action verses another *current* (T1) expectation of what will happen if he takes another action.

              Or, as Mises said, in Human Action:

              “The judgments of value which determine the choice between satisfaction in nearer and in remoter periods of the future are expressive of present valuation and not of future valuation. They weigh the significance attached today to satisfaction in the nearer future against the significance attached today to satisfaction in the remoter future.

              The uneasiness which acting man wants to remove as far as possible is always present uneasiness, i.e., uneasiness felt in the very moment of action, and it always refers to future conditions. The actor is discontented today with the expected state of affairs in various periods of the future and tries to alter it through purposive conduct.

              Again, money (as money) is a proxy *for* goods.

              If I value Good A more than Good B, it doesnt matter that Good A has a lower monetary value or lower (or even negative nominal) interest rate, because I’m valuing the actual good, not the money.

              I forget the exact example, but Bob, in his dissertation, compares an action in T1 that (apparently, in his view) either affects T1, *or* affects T2, and he offers the fact that the action in T2 has a lower interest rate and that acting man chooses T2 as proof of negative time preference.

              But what’s really going on, as explained above, is that he is comparing his current (T1) preference for earlier satisfaction to his current (T1) *expected* preference for satisfaction from a lower nominal rate (in this case, negative) than what he could get in T1.

              Both options are available to him in T1 – he is not choosing later satisfaction. He is prefering to have one apple (I think it was apples) in the future and none now, versus zero apples in the future and eating both now.

              We don’t save our dessert for last because we have a negative time preference for dessert – we do it so that we don’t fill up on sweets and miss out on a nutritious meal.

  3. guest says:

    Jeff Herbener: “If the pure time preference theory is going to be developed in a way that’s acceptable, I think that’s (Fetter,s [sp?] money-only theory of time preference) the path.”

    I’ve only gotten this far, as of yet, and Jeff seemed to be on a roll talking about all values originating with want-satisfaction, that value then being imputed to goods.

    But then he says this?

    All values do originate with want-satisfaction, and that value is imputed to not just goods, but the money that is the proxy *for* those goods.

    So, since monetary interest rates are an expression of the value for goods, and goods are an expression of the wants that those goods will be used to satisfy, a true theory of time preference is all about *real* interest versus merely monetary interest.

    All of economics reduces to want-satisfaction.

    (Hopefully, I’m missing where he’s going with this, and I’ll find out he agrees that Pure Time Preference is based on real time preference.)

    • guest says:

      I got to the next point about Bob saying that Herbener’s view that PTPT being about sooner goods vs. future goods being a problem.

      I guess I’ll just say that that is true or false depending on how technical we’re being.

      The value of goods comes *from* individual’s wants. So, to me, saying that the PTPT is about sooner goods vs. future goods is no different from saying that it’s about want-satisfaction – because you need goods to satisfy those wants.

      But if you want to be technical, no, PTPt is not, strictly speaking, about the goods, but about the wants that those goods satisfy.

      I didn’t gather, from my own reading of that part of Bob’s dissertation, that Bob clarified the issue with this observation.

      It’s moot to me. Goods are a proxy for want-satisfaction, money is a proxy for goods.

      Wants are what’s “real” vursus “monetary”, but, again, since you can’t satisfy wants without goods, I would say that the goods belong in the category of “real” for the purposes of interest rate theory.

    • guest says:

      Ok, so Bob offers, as a thought experiment, a barter economy, and he even gives us knowledge of all the ratios, and then he says, What’s the “real” rate of interest? You can’t tell.

      I disagree. It’s true that there’s no *common* rate of interest, but to expect one is to misunderstand what interest is.

      In a barter economy, the interest is the psychic profit an individual receives after accountind for the “cost” of acquiring and holding barter goods for indirect trade.

      Remember: “Costs” are a logically necessary part of “choosing”. The fact that one chooses one action means that the cost is the second-highest ranking end that was foregone to satisfy one’s highest-ranking end.

      That’s going to be different for each individual, but it’s still a rate of interest.

      (By the way, I like this approach to video responses better than one-offs, because I only have to listen to it once. I’ll probably do this for the video I talked about before, just recently.)

    • guest says:

      Jeff Herbener [41:28]: “It doesn’t matter what the production process is. For any production process, there’s a time discount.

      “And the end that’s to be attained from that particular production process, the person always prefers – as Mises says, “the duration of serviceableness” – the good to be produced and in your hands and serving you, sooner as opposed to later.

      “That’s interest for Fetter [sp? Federer?)] and Mises.”


      *That’s* interest. That’s where the *real* interest rate comes from.


    • guest says:

      Bob Murphy [50:17]: “Look it. I’ve got a quote from Mises …”

      Here he’s talking about when Mises referred to the “ratio of the value assigned to want-satisfaction”

      Bob says, “Just reading the text, prima facia, it looks like he’s saying you take the value of want-satisfaction very close and very far and you divide them. It’s a ratio of want-satisfaction.

      “It looks like he’s dividing utilities- So if utility were cardinal, then this would make total sense. But Austrians are adamant that it’s not.

      “And so, my claim was, Look it, you see how dangerous the Pure Time Preference Theory is? It leads even Mises to talk about dividing utilities …”

      And then Jeff reads the rest of the quote!

      Which is exactly what I did when I addressed this issue in one of my previous posts:


      “Bob then claims that, “The Pure Time Preference Theory of Interest has lead Mises to literally divide the value of want satisfactions. That’s clearly a subjective thing: the value of want satisfaction. Now, he didn’t say ‘the market value of a good’ …”

      “Two points to make, here.

      “One, while it’s true that Mises makes a mistake, here in attempting to divide subjective values (at least in the way he words it, *wink*), there’s nothing about the Pure Time Preference Theory that *required* him to do so.

      “And, two, an extended quote would actually lead you to believe that it’s plausible that he *does not* actually believe in the divisibility of want satisfactions, and that he’s merely attempting to apply the otherwise correct view that “like things can be compared and divided”.

      “Again, this is a mistake, to be sure, but consider a more extended quote:

      ““Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remoter 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.”

      “Is he talking about the ratio of want satisfactions or about the ratio of commodity prices?

      “From this extended quote, we can assume that he made a mistake that the Pure Time Preference Theory does not require him to make, and that what he’s really talking about is the ratio of commodity prices (in money terms) that express his subjective value for the ends expected to be satisfied by those commodities in one time period over his value for those ends expected to be satisfied in a different time period.

      “As well, it shows that, yes, he kind of did say “the market value of a good”, after all.”

      • Transformer says:

        “Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remoter 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.”

        I think we should give Mises the benefit of the doubt here and assume he means “prices” when he says “value assigned to want-satisfaction”. It would make no sense in a work that consistently insist on ordinal utility for “value assigned to want-satisfaction” to mean a cardinal value of utility.

        Jeff still seems to acknowledged that Mises has made some sort of slip here but it not clear to me what it is.

        BTW: Thanks for these extended commentaries on Bobs podcast – very useful!

    • guest says:

      Jeff Herbener [1:00:09]: “It isn’t obvious to me that if you expunge time pre- Or maybe that’s not what you’re saying, I’m not sure.

      “If you say, Well, time preference has no role, whatsoever, in interest- Or, if you’re just saying that fundamental interest comes from money demand and not from time preference- So, maybe you can elaborate on that.

      “But, in any case, if it’s fundamentally from holding money in order to deal with uncertainty, I don’t see how the resulting interest rate provides a economic calculation way, like Fetter [sp?] would have it, of discounting future revenue streams, intertemporally.”

      Right?! I feel like Jeff Herbener and I are taking CrAzY pIlLs!

      If the money doesn’t mean anything – or, in Jeff’s words, “If time preference has no role” (and keep in mind that, in Jeff’s mind, “time preference” is *for* those goods that satisfy wants – then the money isn’t communicating subjective value.

      Or, as *I* have said – and these are not Jeff’s words *YET* – money has to have a link to use-value in order to enable calculations that are of an economic nature (economic calculation).

    • guest says:

      At the end, where Jeff seems to be agreeing with Bob that the legitimate theory of Pure Time Preference only implies a time preference for money and not for goods, the reason is because, as he says, he cannot see how intertemporal exchanges – which are a necessary part of interest – plays a role in barter.

      But see above, where I’ve already addressed this.

      You still have to acquire the barter goods *to hold them* for future trade. *There’s* youre time element in a barter economy.

      The individual has already accounted for the time discount in his assessment that X amount of labor to acquire a good for use in trade is a cost he is willing to bear because he values more what the other guy will give him in trade in the future.

      Problem solved. All of economics begins with an individual’s desire for want-satisfaction. The value of goods follow from it. The value of money follows from it (through goods). The value of money interest follows from it (through money, and in turn, through goods).

      I think in this last part Bob and Jeff aren’t as close as they think on this. I think they’re talking past each other a bit.

    • guest says:

      I like Jeff’s lecture work. I’ve learned some great stuff from him.

      But this format allows him to be more emotive, I think, and I find that to be more enjoyable.

      I know he’s in teacher mode in the lectures, but he seems happier doing it this way.

      And both of you are really cordial. That was a great discussion.

      Thank you.

    • random person says:

      All this talk of time preference reminds me of something Jules Marchal wrote about deferring wages legally owed to forced laborers in order to discourage them from leaving before the period of service demanded from them was complete.

      To set the background:
      * King Leopold II had run an extremely brutal forced labor regime, killing off approximately half the Congo’s population under his rule and the immediate aftermath.
      * Shortly before he died anyway, after a long publicity campaign against him waged by Edmund Dene Morel and others, King Leopold II transferred control of the Congo to his country, Belgium. (I.e. the Congo would be controlled by Belgium’s more democratic leaders, rather than by King Leopold II personally.) It was believed that Belgium would fix the human rights violations occurring in the Congo.
      * Belgium did not actually end the human rights violations, but did gradually mitigate them. The Belgian socialist party (or at least Vandervelde, a prominent Belgian socialist) spoke in favor of Congolese rights, e.g. when Emile Vandervelde spoke out against the human rights abuses that lead to the revolt of the Pende, but although they had some voice they didn’t have power.
      * The typical strategy used during the earlier decades of Belgian rule of the Congo was to pass tax laws as a legal justification. Tax collectors, military personnel, and company recruiters would then go together to forcibly recruit labor. The tax collectors would insist that the Congolese must pay taxes, and since they had no money with which to pay the taxes, this meant they must either sign a contract for a job or go to prison. Company recruiters would offer the jobs that the Congolese were forced to accept. Military personnel would enforce these demands. Another strategy used was to forcibly elevate Congolese collaborators to the status of chiefs, who would then receive a cut of the profits for turning over their own people. The contracts that the Congolese were forced to sign would often be enforced by the chicotte, which was a type of whip.

      Although Congolese were forced to accept these job offers against their will, in many cases, there were still wages. The Belgian logic was that they had to be forced to earn wages so they could pay the taxes. However, presumably motivated to reduce the costs of workers running away, some companies would defer a portion of the wages until the worker’s contract period had expired, the idea being that the promise of wages and the end of the contract would discourage forced laborers from running away. In cases where the deferred wages were not paid until the worker returned to their home village, this may also have served as a strategy for encouraging collaborators to send workers, the idea being that the collaborators would steal the workers deferred wages when they were returned.

      Because the wages were very low (and perhaps also because they would sometimes get stolen by collaborators anyway), a number of forced laborers ran away in spite of the system of deferred wages.

      On page 76 of Forced Labor in the Gold and Copper Mines, Jules Marchal writes,

      Toward the end of 1917, the practice of deferring part of workers ’ wages came under attack. According to an official report, it had been observed on numerous occasions that some workers, on deserting their jobs, left behind several months ’ worth of unpaid wages. The coolness with which these labor conscripts did so, incidentally, showed how negligible their wages really were. And yet the system of delayed payments remained in force. However, as from 1919, wages outstanding were paid at the end of the period of service, at the work site, and no longer in the home areas of the
      conscript laborers.

      In estimating the number of deaths caused by Union Miniere, one of the major companies involved in forced labor operations, Jules Marchal suggests the name, “The Man-Eating Corporation” as an honorific for Union Miniere.

      • random person says:

        This is from page 25 of the same book,

        On 18 August 1912, Martin Rutten, attorney general of Katanga since July 1910, wrote to the vice-governor-general saying that laborers from Kabinda supplied by Lumpungu had complained to him that they were paid only half their wages. He said the retention of part of their wages for three years, though it might conform to the let ter of the law, presented serious problems. The laborers claimed, Rutten added, that their employer had become extremely harsh because he owed them wages. In his opinion, though, this argument tended to prove that wage deferment was effective. On the other hand, he thought the laborers had a more serious case when they argued that they preferred to keep their wages themselves, instead of leaving their money in the hands of white people who were, after all, strangers to them at the time agents from the Exchange were recruiting them in Kabinda. They had in effect, Rutten reasoned, gained some experience since leaving Kabinda. They had seen that white men robbed and exploited their black employees without the least compunction.

        • random person says:

          I guess if the question of reparations takes time preference into account, the reparations should include interest.

          In cases where the wealth from forced labor has been invested and grown over time, this also makes sense that the reparations should include both the original sum (however that is calculated) plus the wealth earned from investing that original sum (however that is calculated).

  4. Un bourgeois says:

    Uncertainty about the future will tend to make interest time preference-based, whatever commodity is being lent.

    Money has low inherent uncertainty by being durable etc. so when a quantity of money is lent out, uncertainty as to whether it will be repaid is the dominant uncertainty. Money also digitizes the reckoning of wealth, making it possible to agree on a numerical rate of interest when lending. That’s why interest is almost always monetary.

  5. Transformer says:

    I am not convinced that the discount of present over future money counts as interest if its due only to liquidity preference rather than time preference

    If money provides liquidity services then its easy to see that it can be rented out just as a tractor can be rented out. Lets say a tractor provides ‘farming services’. It lasts 10 years and because of its ‘farming services’ it can be rented out for $100 dollars a year, if there is no time preference then its current value will be $1000 (the full value of it future income stream). I don’t think this rent can be called ‘interest’ – its really just the depreciation of the tractor.

    Lets say money (gold coins) can likewise be rented out because of its liquidity services. If people think that gold will never lose its value then with no time preferences its present value should be infinity. The fact that it isn’t implies that people are applying time preference in calculating its current value against its future income stream. Its possible that people think that gold may lose its value as a provider if liquidity services at some point in the future – and in this case if there is no time preference I would argue that the rent on money would be very similar to depreciation in the case of the tractor. Time preference would discount the current value below this and only this discounting would count as true interest.

    I think this is an important point as it has a direct bearing on the structure of production – increased time preference will lead to a reduction in roundabout-ness in an economy, while increased liquidity preference will just increase the value of money (by definition reduce the price level) and have no other long term effect.

    • guest says:

      “If people think that gold will never lose its value then with no time preferences its present value should be infinity. …”

      It might help to say that “preference” for money is really a preference for the goods one expects it will buy. Or, said another way, people like that money can be liquidated into goods.

      So, the liquidity value of money could only be infinity if the value for the goods it will buy were infinity.

      “Its possible that people think that gold may lose its value as a provider if liquidity services at some point in the future – and in this case if there is no time preference I would argue that the rent on money would be very similar to depreciation in the case of the tractor. Time preference would discount the current value below this and only this discounting would count as true interest.”

      There would still be interest based on the use-value of the goods it will buy in the future. If the liquidity value goes down over time, but the use-value of certain goods happens to go up, then it might still be profitable to lend out a diminishingly liquid money while there is still some liquidity left.

      (In my mind, the only scenario I can think of to fit your thought experiment is where, say, gold is in such increasinly abundant supply that it begins to lose its value as a medium of exchange [while retaining its usefulness as a commodity if people want gold for those uses].

      (As long as someone thinks that it is worth the opportunities foregone to acquire an intermediary good to substitute for a direct barter good, then the value for a medium of exchange will always exist. I think that will always be the case, so I see your scenario as just a transition from gold to another commodity that derives its trade value from its use-value.)

      • Transformer says:

        Money (because its money!) will always be ‘worth’ its exchange value against other goods. However if money has value for other reasons than exchange (liquidity services or just because it can be used to decorate one’s home) then the higher this exchange value will be.

        If money only has exchange value then (all other things equal) its hard to see any other reason than time preference why present money should be worth more than present money – exchanging money for goods is a point in time thing, you only get to exchange it for other things once.

        However if money provides services just by holding it and these services endure through time then not only will it be worth more in terms of other goods but the possibility will exist to rent money out. If a kilo of gold can be rented out for 50 grams then this looks very much like interest and would exists even people are totally indifferent between the things that the gold can buy now and the things they expect it could buy in a years time.

        My main point is that interest rates based upon time preference would be reflected in the entire price structure – for example in the relationship between market rents and the the discounted value of capital goods relative to these rents, ‘Interest’ based on liquidity preference would only exists in the money loan market. In effect this would be an additional cost to business that needed to borrow money. However as the total amount of money in modern economies is a tiny fraction of total value of all capital goods I think this would have a minor effect on the overall structure of production in the economy.

        • guest says:

          “Money (because its money!) will always be ‘worth’ its exchange value against other goods.”

          Nothing has intrinsic value, including money.

          The value has to be derived from subjective valuations for goods (and services).

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