Hayek vs Mises on the Theory of Interest

From a paper by Arash Vassei:

Hayek attacks the Böhm-Bawerkian formulation of intertemporal choice in “Utility Theory and Interest”, published in 1936. Hayek attributes the ‘confusion’ characterizing the subsequent controversies about the proper relationship between Böhm-Bawerk’s three ingredients, especially the relation between subjective and objective data, to the original formulation of the problem. The ‘pseudo-problem’ of a positive net return on capital in equilibrium, so Hayek, roots in the improper conceptualisation of intertemporal choice. He criticizes the Böhm- Bawerkian framework for treating the utility function as primitive by resorting to the comparison of absolute marginal utilities (Hayek, 1936: 48). Marginal utilities are not simultaneously determined by subjective and objective data, including, besides preferences, the state of technology (the book of blueprint) and the levels and structure of endowment (ibid.: 44-5).

Also in Mises’s outline, marginal utilities are purely intrinsic phenomena. They are introduced independent of relative physical scarcities and are as such given data to the economic system. Indeed, even though Mises categorizes action as a choice among alternative means to a variety of ends, scarcity is introduced as an absolute. It is because any quantity of a given good ‘can only produce a limited effect, some things are considered scarce and treated as means’ (Mises [1949]1998: 120). Mises’s ordinal measure of this ‘limited effect’, his utility function, is negative. He refers to ‘felt uneasiness’, which is to be minimized. Utility means in this context simply this: causal relevance for the removal of felt uneasiness. (Mises [1949]1998: 120)

The term ‘causal’ is meant to exclude simultaneous determination. Marginal utilities are disproportionally attached to ‘the various portions of a supply of homogenous means (diminishing marginal utility). Each portion is valued separately’ (ibid.: italics mine). Small quantities of any given stock satisfy the most important pleasures or reduce the most unbearable pain. High quantities can additionally satisfy less urgent ends or reduce more tolerable disutility.

This, of course, affects the conceptualization of general equilibrium. Prices coordinate the excess demand relations of consumers. In an exchange economy, each consumer’s excess demand relation is directly derived from the primitive utility function. Single prices are thus independent of each other, and relative prices therefore also primitive.  The only mechanism needed is the law of one price, in operation only in disequilibrium.  Thus, market process theory is treated as a substitute for general equilibrium analysis.  This is also true for Mises’s treatment of intertemporal preferences. Indeed, it is exactly here where we find the very hawkish prediction of his business cycle theory: time preference as a primitive, directly determining optimal intertemporal allocation independent of any other economic data, is responsible for his overemphasis on consumer sovereignty and mean-reversion.

Hayek’s critique highlights the consequences of such utility analysis for Böhm- Bawerk’s theory of intertemporal choice, especially given the choice to assume total consumption over time to be homogenous. Thus, according to the underlying utility framework, intertemporal exchange is reduced to analysis of the law of one price. At zero rate of time preference, general equilibrium is restored on a single market for a given total quantity of homogenous supply. Because physically identical commodities at different dates are treated as perfect substitutes, the equilibrium condition is fulfilled at equal absolute marginal utilities of present and future consumption for each date, indicating stationary equilibrium consumption at constant prices (Hayek, 1936: 44-8).

Mises theory of interest attempts to provide reason for the fact that the law of one price fails to establish a single price and resumes to Böhm-Bawerk’s second cause. The relative intertemporal price, the rate of interest, is directly imposed by the rate of time preference, the exogenous subjective rate of discount on future consumption. The ‘originary’ rate of interest is thus a pure value phenomenon, independent of the level and growth rate of consumption, identical with the prevailing rate of time preference. Objective data is unable to alter intertemporal equilibrium allocation. Whatever the supply of total consumption, and whatever its initial distribution in time, the long-run equilibrium allocation is unidirectionally determined by an unexplained rate of time preference.

In stationarity, Böhm-Bawerk’s first cause of interest is absent. Right because its sign is contingent on the data of the system, Mises dismisses the rate of time preference due to changing future consumption (Mises 1940: 442–4). Instead the second source, the systematic undervaluation of future consumption, is introduced as a categorical aspect of human action so that “the very act of gratifying a desire implies the gratification at the present instant is preferred to that at a later instant” (Mises [1949]1998: 481). Thus, Mises superimposes the intertemporal preference relation. In fact, however, the dominant role of a positive rate of time preference is an embarrassment to Mises’s analysis (Hayek [1927]1984: 55). In marginalist analysis it is illegitimate to presume that agents categorically discount future consumption at a constant rate whatever other primitives are, as it is illegitimate to assume ad hoc that agents always prefer apples to bananas, independent of other data. As Hayek points out:

“The fact is that the assumption of identical utility curves at all successive moments states not merely the general postulate that the choice between present and future will be made in the same way at different moments, but implies beyond that that the choice will be made in a particular way. […] It is impossible to decide on a priori grounds what the actual attitude of the person in any given position will be.”

(Hayek, 1936: 48, 51; his italics)

29 comments to Hayek vs Mises on the Theory of Interest

  • Current

    Ow, my head hurts. That passage makes “The Pure Theory of Capital” sound clear and straightforward. I’m going to have to read some James Joyce to recover.

  • Bil

    That is funny Current.

    I was wondering if I have the time to try to figure it out.

    But at first pass, it fits in with my basic principle that if Hayek and Mises disagree, Hayek is right.

  • Current

    By bringing up lots of tangential issues at once AMV makes the passage above very difficult to follow. I doesn’t accurately describe Mises’ position either. I’m not going to bother that much with it, I haven’t the time right now.

    There are a lot of points where Hayeks interest theory is better than Mises. That is one reason Rothbard uses Hayek’s work as the basis for his theory in “Man, Economy and State”. Mises never wrote at a long enough length on the subject. He didn’t get it as wrong as AMV thinks though.

    However, there are some important points where I think Mises is more right than Hayek. The treatment of “productivity” is difficult in both Mises and Hayeks interest theory, but I think Mises is more in the right on that.

  • Current

    AMV writes: “The relative intertemporal price, the rate of interest, is directly imposed by the rate of time preference, the exogenous subjective rate of discount on future consumption. The ‘originary’ rate of interest is thus a pure value phenomenon, independent of the level and growth rate of consumption, identical with the prevailing rate of time preference. Objective data is unable to alter intertemporal equilibrium allocation.”

    This is the part I think is wrong. In Mises the fact that each person demonstrates time-preference is referred to as a “category of human action” or something and Mises considers it certain and eternal. However, he doesn’t consider the *rate* of time preference that any individual shows to be similarly constant and certain.

    Mises is not saying that “Objective data is unable to alter intertemporal equilibrium allocation.” Mises wrote: “Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future”. Note the “other things being equal”, if they are not equal then it’s not the same thing.

  • amv

    Current,

    you are perfectly right in complaining about the density of the exposition. I put too much info in too little space. But I think you err in theory. I never argue that the rate of time preference is ‘constant and certain’. Mises is compatible with heterogenous, non-constant, and uncertain rates of time preference (also the ABCT takes the rate as given to the extent that forced saving doesn’t result from a redistribution of wealth and income). What I argue is that Mises doesn’t allow the growth rate of income/consumption to impact the rate of time preference. I think the evidence is on my side. There is a reason why this approach is called the Pure Time Preference Theory. I introduce Mises’s interest concept as a tax on non-ownership and argue that it rests on the classical idea of advanced capital (incl. free capital). Whatever the rate of time preference, it is a purely subjective category unrelated to objective data. Further, there is no Hayekian theory of interest. In Pure Theory of Capital he is explicit: it is Fisher’s theory of interest on which he build his capital theory. Wicksell comes also very close to this position in a paper published post mortem in 1928 written 1926). Rothbard even rejects indifference maps and shows that the Misesian influence is blind alley. It is however the convexity of such preference orderings (consumption smoothing) that allows us to show changes in the rate of time preference due to changes in objective data. Such preference for consumption smoothing rules the roost in The Pure Theory of Capital.

  • Greg Ransom

    This is hard stuff, folks. And it takes time to massage the language into a place where it can say new things and isn’t contaminated by old mistakes.

    I see progress being made here, and tough problems tackled.

  • Current

    I still disagree you say “Whatever the rate of time preference, it is a purely subjective category unrelated to objective data. ”

    You are misunderstanding what “subjective” means in this context.

    Let’s say I have a choice between buying a porche 911 and a Rolls-Royce. I have the information given by the manufacturer about the performance of each car, about the space inside and so on. This is objective information.

    Now, what the “subjective” in “subjective value theory” means is that I make my choice based on my subjective view. It doesn’t mean that I don’t take the objective facts into account. What it means is that in taking the objective facts and subjective opinions into account I come to a subjective decision.

    The same is true of interest, it comes about from the subjective decisions to act by individuals. That does not mean that those individual’s decisions are unaffected by objective facts or indeed subjective opinions about what the future will be like.

    Have you read Garrison’s paper “In Defense of the Misean Theory of Interest”?

  • amv

    Current,

    you write: “Now, what the “subjective” in “subjective value theory” means is that I make my choice based on my subjective view. It doesn’t mean that I don’t take the objective facts into account. What it means is that in taking the objective facts and subjective opinions into account I come to a subjective decision. The same is true of interest, it comes about from the subjective decisions to act by individuals. That does not mean that those individual’s decisions are unaffected by objective facts or indeed subjective opinions about what the future will be like.”

    Excactly! But this neoclassical theory, not Mises. Mises is about this: no matter how the distribution of income over time, no matter the expected time shape of consumption, the marginal utility of present consumption is higher than the marginal utility of future consumption and this is because of a systematic undervaluation of future needs. Note, it is Hayek who uses the distinction between subjective and objective data. Certainly, he did not intended to break with Austrian subjectivism. My argument is that Mises has no conceptualization of intertemporal choice (whereas Hayek invented intertemporal general equilibrium theory and still worked with it in The Pure Theory of Capital, published in 1941.)

    Yes, I’ve read Garrison. I like him a lot as a macroeconomist (although I disagree). I believe his comparative advantage is not interest theory. BTW, Kirzner is especially problematic since he claims that the choice between the alternative interest theories of his time, including Mises’s PTPT, is a matter of philosophy. I remember reading this … I was no Austrian anymore.

  • Current

    AMV,

    I’m sure you have read Garrison, but have you read that particular paper? It tackles the issues you are discussing very directly, and it’s only short.

    If the answer is yes, and you have read it then explain what your response is. I think you are wrong about Mises’ position.

  • amv

    Current,

    yes, I’ve read Garrison’s defence of Mises’s interest theory. As you can imagine, I side with Moss and just think that his exposition of the problem leaves out many even more fundamental problems with Mises’s theory. Garrison makes the point that Moss has a too neoclassical view on Mises’s praxeological perspective. Garrison, as I understand him, don’t want Mises to be judged by neoclassical standards and argues that Mises’s approach is internally consistent. Thus, he takes Mises’s praxeological view as a (superior) given, a view I cannot share. Especially the claim that Moss is too much Fisher is not convoncing. How can that be? There is no such thing as a ‘too much’ correct and consistent theory. Fisher’s approach is clearly the benchmark for all interest theories since Adam Smith. As I said above (but obviously without impact), Hayek build his capital theory on (or around) Fisher’s theory of interest. Thus, I think it is clear that the ‘law of the excluded middle’ applies: either Mises, or Hayek, but not both. You seem to side with Mises. That’s a choice. I have laid out some reasons why I think it is a bad choice. Did I pass your exam?

  • Current

    I’m not an academic and I don’t set exams ;)

    I don’t agree with your view on Garrison’s paper. His point is that Mises’ view is consistent and also consistent with neoclassical analysis. Neoclassical analysis concentrates on different things, it takes as a sort of null-case the situation where consumption is the same in each period. Mises’ takes a different baseline but his analysis is just as correct.

    I don’t agree with you that Mises’ position is that far away from Fisher’s.

    On page 527-528 of Human Action Mises writes: “Bohm-Bawerk has once for all unmasked the fallacies of the naive productivity explanations of interest, i.e., of the idea that interest is the expression of the physical productivity of factors of production. However, Bohm-Bawerk has himself based his own theory to some extent on the productivity approach. In referring in his explanation to the technological superiority of more time-consuming, roundabout processes of production, he avoids the crudity of the naive productivity fallacies. But in fact he returns, although in a subtler form, to the productivity approach. Those later economists who, neglecting the time-preference idea, have stressed exclusively the productivity idea contained in Bohm-Bawerk’s theory cannot help concluding that originary interest must disappear if men were one day to reach a state of affairs in which no further lengthening of the period of production could bring about a further increase in productivity[2]. This is, however, utterly wrong. Originary interest cannot disappear as long as there is scarcity and therefore action.”

    Notice that he doesn’t say that Bohm-Bawerk was wrong to introduce productivity “to some extent”. Mises’ point is that the theory of interest can’t be based entirely on productivity.

    He points in note [2] to Hayek agreeing with him about this. Then on pages 528-529 he assumes that no further progress in technology is possible. He doesn’t say that the rate of interest would be the same if that condition were relaxed.

  • amv

    Current,

    given what you write over your last two comments, I really don’t think that we personally disagree about the proper interest theory. Both of us believe that time preference and productivity both play a role in determining interest. We disagree if Mises is in our orbit or is not. If you resolve the concept of productivity in general equilibrium theory, you get two of three sets of so-called real-data: the endowment of the model economy with a vector of all resources, inputs, capital goods, or whatever you want to highlight. The other set is the dispersed set of technological knowledge. Together, they are called ‘objective data. The third set, and here is where time preference steps in, is a preference ordering. This is called ‘subjective data’. In your comment you refer to a “null-case the situation where consumption is the same in each period”. Not consumption, but the preference ordering is constant in neoclassical theory(deterministic or stochastic). Consumption choices are optimization problems, that is, maximization under constraints. These constraints are given by all sets together, simultaneously, no set more influential than the others. Böhm-Bawerk did not think so. He believed that productivity and time preference forces work independent of each other. In a long and exciting debate between Wicksell, Fisher, Fetter, and others, the relationship between the sets described were at the center of the discussion. General equilibrium oriented economists like Wicksell and Fisher, and later Hayek, came to a solution that is pretty much standard in modern economics. Fetter, and later Mises, took an opposite position. The claimed that one set is more important than the others. There subjectivism rests in making preferences king. In neoclassical theory consumption choices can vary even with constant preferences. In this case either the knowledge set or the endowment set changes, or both. Hayek, Wicksell and Fisher believed that simultaneous determination of the economic system, the ever present interdependency of markets is an essential ingridient in dynamic or causal analysis. They simply had no tools at hand. Mises in contrast, believed that their is a choice to make: either causality, or simultaneous determination. I chosed the former. Thus, in Mises’s case (intertemporal) consumption choices change if and only if the rates of time preference changes. Equipped with this theory, he claimed that no money induced investment process can sustain, not because he believed that such injection leave data untouched, but because such changes cannot alter the equilibrium or stationary level of income which is solely determined by the rate of time preference. The entire system bows to the orders of the owning class and bribe them not to consume the subsistence fund.

  • Current

    Your last comment indicates to me that you have problems with Mises’ politics and policy recommendations. That’s not directly connected to the issue of interest rate theory under discussion here though.

    You make four main claims that I think are wrong:

    > Thus, I think it is clear that the ‘law of the excluded middle’
    > applies: either Mises, or Hayek, but not both. You seem to
    > side with Mises. That’s a choice.

    No. The challenge in interest rate theory and capital theory is to find good theory. We should take it from whereever we can. Its not a matter of either choosing Mises or choosing Fisher and Hayek.

    The difference between having the “same preference ordering per period” as the baseline and having “no action” as the baseline is just a difference in how the problem is put.

    > I really don’t think that we personally disagree about
    > the proper interest theory. Both of us believe that time
    > preference and productivity both play a role in
    > determining interest. We disagree if Mises is in our
    > orbit or is not.

    > Excactly! But this neoclassical theory, not Mises.
    > Mises is about this: no matter how the distribution of
    > income over time, no matter the expected time shape
    > of consumption, the marginal utility of present
    > consumption is higher than the marginal utility of
    > future consumption and this is because of a
    > systematic undervaluation of future needs.

    Above I’ve quoted your theory about what you think Mises is saying. I disagree. In his interest theory Mises is not concerned with changing the distribution of income over time. He doesn’t say “no matter what the distribution of income over time” anywhere, he says exactly the opposite. He says things like “ceteris paribus” and “if no further progress in technology can be made by mortal men”. In each of his writings about interest theory he specifically holds that each period is similar to the previous, without rising or falling income.

    The “Mises’s” you are attacking is a straw man. You won’t find the real Mises denying anywhere that changes in wealth affect or expected future wealth change the rate of interest.

    > My argument is that Mises has no conceptualization of
    > intertemporal choice

    In marginalism there are several different prioritizations. Firstly, there is the prioritization of ends, then that of means. When Mises says that a person prefers satisfaction now rather than later he is discussing ends. Note that this is not “systematic undervaluation” its just valuation. In order to live we have to value the present more than the future, as Mises points out.

    > If you resolve the concept of productivity in general
    > equilibrium theory, you get two of three sets of
    > so-called real-data: the endowment of the model
    > economy with a vector of all resources, inputs,
    > capital goods, or whatever you want to highlight.
    > The other set is the dispersed set of technological
    > knowledge. Together, they are called ‘objective data.
    > The third set, and here is where time preference
    > steps in, is a preference ordering. This is called
    > ’subjective data’. In your comment you refer to a
    > “null-case the situation where consumption is the
    > same in each period”. Not consumption, but the
    > preference ordering is constant in neoclassical
    > theory(deterministic or stochastic). Consumption
    > choices are optimization problems, that is,
    > maximization under constraints. These constraints
    > are given by all sets together, simultaneously, no
    > set more influential than the others. Böhm-Bawerk
    > did not think so. He believed that productivity and
    > time preference forces work independent of each other.

    Here, your confusingly comparing the setup of a general equilibrium to your opinion of what Böhm-Bawerk thought.

    In reality all of the factors that you mention above in the model are observed by human minds. They then make decisions to act based upon their assessment of them. That’s not to say that the “time-preference” part is more important than the others. All of them are important in the process of subjective prioritization. Mises concentrates on time-preference in his discussion of interest in order to demonstrate that interest must exist and be a positive value under all conditions. He doesn’t say that only time preference determines it’s rate.

    > In neoclassical theory consumption choices can vary
    > even with constant preferences. In this case either
    > the knowledge set or the endowment set changes, or
    > both. Hayek, Wicksell and Fisher believed that
    > simultaneous determination of the economic system,
    > the ever present interdependency of markets is an
    > essential ingridient in dynamic or causal analysis.
    > They simply had no tools at hand. Mises in contrast,
    > believed that their is a choice to make: either
    > causality, or simultaneous determination. I chosed
    > the former.

    Causal analysis doesn’t necessarily remove the possibility of “simultaneous determination”. “Simultaneous determination” is not a property of the real world, but rather the property of a formal model. What it means is that the objective and subjective factors that you mention above feed into the decisions of actors and therefore feed into the market interest rate. We agree that this happens and I think Mises would too.

    What your essentially doing here (and Fisher and Hayek did this too) is taking little parts of other aspects of economics and bolting them onto the side of “interest theory”. Why bother? It only makes the theory more difficult. All of these other bits that get hacked off, like expectations, productivity and wealth-distribution are quite happy in their own part of economics. And, in their own parts of economics they clearly affect the interest rate, as Mises noted.

  • Bil

    Prof Vassei:

    Sorry about my earlier remarks.

    I am sure your analysis is well worth the time to understand.

    (I don’t pretend that my writing is always clear.)

    I still think Current’s remark was funny.

    Bill

  • Bil

    Vassei:

    “The entire system bows to the orders of the owning class and bribe them not to consume the subsistence fund.”

    This statement seemed to be a bit odd.

  • I think that Mises wanted to argue that if people were indifferent as to when they consumed, there could not be a positive interest rate.

    I think this is correct, but I don’t find it very interesting.

    I think I am with most economists in being interested in what factors determine the actual level of the interest rate.

  • wwoolsey@comcast.net

    If you get a chance, Prof. Vassei, please send me an email

  • Current

    Bil,

    “This statement seemed to be a bit odd.”

    You have to understand the context of the interest rate debate. If interest is purely due to expectations of future productivity then, so the argument goes, it may be possible to eliminate it. Then, adherents of this view argue that it it may be possible to create a more equal world where there is still strong economic growth.

    I disagree with AMV about this. But, I can understand his line of thinking. If you read some Bohm-Bawerk it becomes quite clear.

  • Current

    >I think that Mises wanted to argue that if people
    > were indifferent as to when they consumed,
    > there could not be a positive interest rate.”

    That’s right. The argument is mostly about why there must be an interest rate, not about it’s level.

    However, what are the real chances of us coming up with a predictive theory that predicts it’s level? Not very high in my view.

  • amv

    As a grad student I don’t like to be called prof. vassei, even if ironic. My last name is Molavi Vasséi, Molavi is fine, Arash is perfect. Since ‘Current’ claimed that he is a non-acedemic, I simply attempted to reduce presumptions to improve communication. Further, Bil, there is no need for excuses. Current’s first commt is funny and, more than that, he is right! This is a draft of my first serious paper ever written …. and I made – inter alia – some strategic mistakes. I have no problem to admit that.

  • amv

    Bil,

    you write: “This statement seemed to be a bit odd.” This is odd. I just argue that this is Mises, too. He is clear that in ERE there is no positive physical productivty of capital. All income is distributed to original factors. He is clear that capital nevertheless has a positive value productivity. That is, ownership has still a rental price in ERE. Putting these statements together, you get interest as a transfer payment. Now, in ERE, all quantities – including the subsistence fund as aggregate waiting-capacity and the average period of production – are by definition constant. Given Mises’s additional assumption that time preference is always positive and the subsistence fund – including free capital, that is, the consumption goods available and to be distributed to sustain the ERE-level of gross product – the transfer payment is paid to bribe the owners of capital goods not to consume them and rather hand it out to workers employed in sustaining the ERE.

  • amv

    Current,

    “Your last comment indicates to me that you have problems with Mises’ politics and policy recommendations. That’s not directly connected to the issue of interest rate theory under discussion here though.”

    I make no normative statements at all. Policy is not the subject of my paper. Of course, if Mises’s business cycle theory is analytically flawed, there is little reason for it to inform policy.

    “No. The challenge in interest rate theory and capital theory is to find good theory. We should take it from whereever we can. Its not a matter of either choosing Mises or choosing Fisher and Hayek.”

    Of course, yes. There is only good and bad economics … . I simply supply some argument why Mises’s may be bad economics, suggesting that Hayek’s is good.

    “Here, your confusingly comparing the setup of a general equilibrium to your opinion of what Böhm-Bawerk thought.”

    No, I am just saying that those Austrians who follow the Lausanne path produced better results than those who don’t (Mises and Rothbard). Böhm-Bawerk is the offspring of correct interest theory but if I had to put him in some camp, I choose the latter. Note, Mises uses the average period of production even after all others, especially Hayek, stopped doing so. Do you really believe that there is no choice between Mises and Hayek? The average period is an attempt to homogenize and aggregate the capital structure. And again: why do you think that Mises’s approach to interest is called The Pure Theory of Time Preference, if – as you suggest – also Mises allowed PHYSICAL productivity to co-determine interest?

    “Causal analysis doesn’t necessarily remove the possibility of “simultaneous determination”.”

    This is what I say. But this is not what Mises writes. In this, he follows Böhm-Bawerk and is of course influences by Menger’s causal-genetic method. Further, it is true that in Human Action, simultaneous determination is present in his atemporal reflections on prices and costs. But in his intertemporal vision, I cannot see it.

    “What your essentially doing here (and Fisher and Hayek did this too) is taking little parts of other aspects of economics and bolting them onto the side of “interest theory”. ”

    No, from the general equilibrium perspective, there is no independent interst and capital theory at all. Arrow-Debreu economies express interest rates as intertemporal price relations which is equivalent to an expression as own rateS of interest (the capital ‘s’ is important). Nothing is bolted onto the side of ‘interest theory’. Interest theory is rather resolved into a more general setting.

    “Why bother? It only makes the theory more difficult. All of these other bits that get hacked off, like expectations, productivity and wealth-distribution are quite happy in their own part of economics.”

    That sounds very like the representative mainstream grad-student. Congrats! I believe that significant knowldge can be gained by seeing the interrelations of these fields. The knowledge problem would fall victim to an even greater specialization in individual economist’s activities.

  • Current

    > Note, Mises uses the average period of production even
    > after all others, especially Hayek, stopped doing so. Do
    > you really believe that there is no choice between
    > Mises and Hayek? The average period is an attempt to
    > homogenize and aggregate the capital structure.

    Yes, and we can agree that this was a mistake. But, that doesn’t mean that we must dismiss the rest of Mises ideas too. Nobody dismissed Bohm-Bawerk’s ideas because he made this same mistake.

    You can make a rhetorical dichotomy between too different groups. But, it’s taking things too far to think that we can’t learn from both.

    > And again: why do you think that Mises’s approach
    > to interest is called The Pure Theory of Time
    > Preference, if – as you suggest – also Mises allowed
    > PHYSICAL productivity to co-determine interest?

    I don’t think Mises called it the “Pure Theory of Time Preference”.

    > This is what I say. But this is not what Mises writes.

    So you say. But, I have yet to see a statement by Mises where he claims that the market interest rate is determined only by time-preference in a situation where productivity is changing.

    > That sounds very like the representative mainstream
    > grad-student. Congrats! I believe that significant knowldge
    > can be gained by seeing the interrelations of these fields.

    I agree, I’m not claiming here that the interaction between these fields should be ignored. But, in the discussion we’ve had here you only seem happy that the subject of interest or time-preference is involved if it is explicitly stated. I don’t think thats the right way to look at it. When you come to a discussion in Mises about interest rates don’t wipe the slate of your mind clean and think “nothing I’ve read so far matter much for this”. What I think Mises intends is that all of the other processes that are described elsewhere in his work continue to operate at the same time as each other. So, if an individual (and by extension a group) expect to become richer in the future then that will change the preference ordering of those individuals. I don’t think that we can be very certain about *how* it will change that ordering.

  • Current

    Also, I apologise for my snarky comment above about your writing style. I have sympathy with your difficulty in writing something like this. I’ve never written anything long in any other language than English, which is my native language. I’m sure if I did write something long in another language it would be much worse than what you’ve written.

  • amv

    Thank you Current for your kind words.

  • Greg Ransom

    Arash — we want to do economic science .. the talk of “bribes” is a barrier to understanding, and makes it seem like you don’t want to do economic science, but rather than dark ages morality / theology. A bribe is a crime. The reward or whatever you want to call it that someone gets for making productive use of their production goods, within the domain of science, is not a criminal activity.

    If you want to keep an audience, best to use language that isn’t a barrier to understanding and doesn’t throw up non-scientific red herrings, taking people away from understanding, or even turning people off from even reading you.

  • amv

    bribe is always against written laws per definition, the word ‘bribe’ however is not normative per se. Greek people have to bribe because it is part of their system. But Greeks are no criminals and only a radical conventionalist would see Greeks being involved in ‘criminal activity’ each day. I think Rothbard say something like this, too. Would you prefer ‘pay’ instead? I did not intend to say something different. I thought that this is obvious. And I also provided the technical and purely innocent term: transfer payment.

  • Greg Ransom

    A couple things.

    This is a valuational element for a logical construct given to and surveyable by a single mind. There doesn’t have to be any real money or real exchange involved.

    This is simply part of the valuational consideration for an individual deciding whether to consume or produce.

    You could call it a “reward” or many other things but it’s bizarre to talk of “bribing” oneself.

    The problem here is that we borrow language from the real causal world of the market to characterize elements of a formal logical / math construct.

    This language inevitably misleads us and causes failures of communication between different people.

    The same problem infects the philosophy of language / logic.

  • Current

    I agree with Greg about this. What Mises is suggesting is that you have to “bribe” anybody. It doesn’t matter who the owning class are. Since they will have time-preference they will demand interest.

    I can’t see any way of arguing against this. It doesn’t matter if AMV thinks that exhibiting time preference is a sort of sin it’s inevitable.

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The more the state ‘plans’, the more difficult planning becomes for the individual. — F. A. Hayek

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