Interest as Cost of Immediacy

Interest is often justified as a reward for deferred consumption or waiting. That is clearly based on the perspective of the recipient of interest, the lender. On the “flip-side of the coin”, what is the perspective of the borrower and payer of interest?  Isn’t it the cost of not waiting or immediacy? Doing a Google search, I found a few sites that used the phrase “cost of not waiting”, but it seems rarely used by economists.  Doing a Google search for both “cost of not waiting” and “wages,” I got only two hits. One was a website of the American Economic Association. However, the “cost of waiting” therein wasn’t about wages. A search for both “cost of immediacy” and “wages” gave a few more hits. Again the connections were coincidental; the “cost of immediacy” was about the speed of execution of investment trades.

Eugene Böhm-Bawerk constructs an example to justify income to an entrepreneur-capitalist and criticize the labor theory of value in his Positive Theory of Capital (Chapter XII). He imagines building an engine over a 5-year period, employing 5 workers. Worker #1 works the first year, #2 the second year, and so on.  They are equally skilled and work the same number of hours. He values the finished engine at $5,500. Assuming the entire value comes from labor, one might say that each worker merits $1,100. Böhm-Bawerk says that can’t be correct, because the different workers wait different times between completing their individual labors and the end of the 5 years. How about $1200 for worker #1, $1150 for worker #2, $1100 for worker #3, $1050 for worker #4, and $1000 for worker #5? That seems okay, unless each worker demands payment upon finishing his work. Enter the capitalist, who pays each worker $1000 upon completion of his work, and retains $500 at the end. The $500 is the capitalist’s interest, the factor cost of capital. Böhm-Bawerk does not describe $200 as worker #1’s “cost of immediacy”, $150 as worker #2’s “cost of immediacy”, and so forth. However, the phrase surely fits.

For an entrepreneur who borrows to enable a project, the fit is not as good because it is not inevitable that the project will eventually be done by waiting. On the other hand, for borrowing to buy consumer goods or a home to live in, “cost of immediacy” is very apt.

It also fits the interest and/or fees for the borrower (not the lender) of a payday loan. This is not to liken the lender to an employer. The borrower is not an employee of the lender, but a customer. The lender is not paying a wage to the borrower.

The “cost of immediacy” is an example of “time preference”, an often used concept in economic theory. For example, a person prefers X now versus X later or X+ later, or vice-versa, where X+ is a greater quantity of X. It is typically used regarding consumption goods or capital or to explain interest, as on the Wikipedia page. For example a capitalist or a future retiree prefers $150 in 5 years versus $100 now.  Besides Böhm-Bawerk’s example, it seems rarely used concerning a worker receiving wages. 

A different sort of cost of immediacy is to pay X+ versus X, both immediate, to obtain something sooner. Some examples are:

- Paying more to deliver or receive something faster than alternative methods. FedEx was built on that desire.
- Paying a higher airfare due to booking shortly before travel. This is very common in business.
- Paying for a taxi versus waiting for a cheaper, later shuttle at an airport.

- Buying the latest high-tech phone or other thing when its price is very likely to be much lower later.

Another cost of immediacy appeared in today's news. The title should suffice. Visa, Wal-Mart Move to Speed Checkout for Customers With Chip-Enabled [Credit and Debit] Cards