Pure Time Preference Theory of Interest #4

Murphy in Choice portrays Böhm-Bawerk as a champion of the time preference view of interest, but economics professor Jeffrey Herbener says Böhm-Bawerk clearly rejected the PTPT. In the first lines of Böhm-Bawerk's Capital and Interest he states what he considers to be the problem of interest: “Whoever is the owner of a capital sum is ordinarily able to derive from it a permanent net income which goes under the scientific name of interest in the broad sense of the term.” As Böhm-Bawerk makes clear in describing his theory, however, this way of putting the matter allows for both time preference and value productivity influences on interest. ... The PTPT, in contrast, makes no claim about the amount of goods being generated in production, but only about the net (monetary) income earned from trading present money for future money. It states that time preference will always generate a positive difference between the selling prices of output and the buying prices of inputs"  (Herbener, The Pure Time-Preference Theory of Interest, 21).

"Böhm-Bawerk has once for all unmasked the fallacies of the naïve productivity explanations of interest, i.e., of the idea that interest is the expression of the physical productivity off actors of production. However, Böhm-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 naïve productivity fallacies. But in fact he returns, although in a subtler form, to the productivity approach" (Mises in Herbener, 72).

In the mid-1830s, the Irish economist Samuel Mountifort Longfield worked out the later Austrian theory of capital as performing the service for workers of supplying money at present instead of waiting for the future when the product will be sold. In turn the capitalist receives from the workers a time discount from their productivity. (Rothbard in Herbener, 63).

"We should note, first of all, that this theory is not necessarily vulnerable to the basic Böhm-Bawerkian criticism of all productivity-of-capital theories of interest. Böhm-Bawerk had criticized such theories of interest because they ignore the essential interest problem (as formulated above). It will not do to say that the machine yields interest (in the form of a flow of rentals that is greater than the cost of the machine) because the machine is physically productive (Kirzener in Herbener, 102).

"Interest is, in this view, the marginal productivity return on a scarce factor, viz., waiting. The Fisherian “productivity-of-waiting” theory emphatically recognizes the significance of time preference" (Kirzner in Herbener, 103).