Murphy's Choice uses
an example of a tractor to present
Böhm-Bawerk's
argument for
the pure time
preference
theory
and against the productivity theory. Böhm-Bawerk used
a different example, but the tractor example serves as well.
Suppose
a tractor is expected to yield an additional $1,000 of revenue each
year for the next 10 years before being junked. Böhm-Bawerk
in
effect argued that the only reason a capitalist could earn money by
owning the tractor is that its initial purchase price is less
than
$10,000. If the tractor would cost $10,000, the capitalist would only
break even. If the cost were more than $10,000, the
capitalist would expect to lose money.
If
the tractor cost is $5,000, then the capitalist would earn a 7%
[approximate]
return,
assuming each $1,000 is reinvested until the end of the 10 years.
Note: Assuming no reinvestment,
the capitalist could pay
$7,022
and
earn 7.00%. Solving the equation:
-7022 + 1000*(1+r)-1
+ 1000*(1+r)-2
+ 1000*(1+r)-3
+ ... +
1000*(1+r)-10
= 0
yields r
= 0.0700 or 7.00%. The
variable r
here is commonly called internal
rate of return. An equation of this sort
is widely used to evaluate capital projects.
"By
this procedure, Böhm-Bawerk
had
transformed his original question. Rather than asking, 'Why do
capitalists earn an effortless flow of interest income?', he could
instead wonder, 'Why is it that the initial purchase price of capital
goods systematically fall short of the future income their use is
expected to yield?' Against this metric, Böhm-Bawerk
measured
all of the explanations of interest that economic theorists had
offered before his own writing" (Choice
226).
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