Pure Time Preference Theory of Interest #5

"This interest income, then is not derived from the concrete, heterogeneous capital goods, but from the generalized investment of time" (Murray Rothbard, Man, Economy, and State, 319).

"The difficulty is—and indeed, I think it is at once the greatest and the most stimulating difficulty of the whole problem of interest—the difficulty is, to explain in what manner, and by the employment of what intermediary processes those heterogeneous component elements (they include objective technical factors, and highly subjective psychological motives) combine and cooperate to produce that end result which we know as the homogeneous phenomenon of interest" (Böhm-Bawerk, Capital and Interest, 227).

Clearly heterogeneous factors are combined to often produce a positive outcome, but what exactly is homogeneous about interest? Interest rates vary by duration – short, intermediate, and long-term debt and the credit risk of the borrower. 

The purity of the PTPT seems to have been obtained by eliminating productivity and the entrepreneur.

In Volume 1 of Capital and Interest Böhm-Bawerk critiques the interest rate theories of others. In Volume 2 he presents his own. "The natural difference in value between present and future goods, the existences and causes of which I have set down in the preceding chapter, is the fountainhead from which all interest takes its origin." He presents the chief instances of interest and claims the same causative force is at work, that is, the force is the difference in value between present and future goods.

The simplest instance is the loan. The second instance is "originary interest", the result of activity carried out by the entrepreneur. He buys goods of remoter order -- raw materials, tools, machinery, and labor, and via the production process converts them into goods of the first order, products ready for consumption.  The third instance is interest on durable goods used in production. Why he chose to put this in a separate category is beyond me. 

Further about "originary interest", which is also called "profit" and "surplus proceeds," Böhm-Bawerk wrote: "Of course, for future goods to become present goods it is not sufficient that time march on." The production process transforms them into end products.

So there is more to "originary interest" than mere time preference. Being that "originary interest" is so different from loan interest, using the word interest for the former muddles rather than proving essential similarity. The price of future goods when they are eventually sold is typically very contingent. The future amount received on a loan is typically not. Yet Böhm-Bawerk asserts: "the market price of the production good called "labor" must always be lower than the future value and price of the finished product."

I think not. The future value and price of the finished product is contingent, so his use of "must always" is unjustified. He did not say expected future value and price, which would make a very different proposition.

Böhm-Bawerk even denies the relevancy of contingency (uncertainty). "Very frequently, however, our valuation of future and/or immediate goods is modified by the operation of an additional element which causes us to evaluate them somewhat or even considerably below their future marginal utility. But I wish to add here immediately that this element has absolutely no connection with the rise of the phenomenon of interest. The element I am referring to is uncertainty" (Capital and Interest, Volume 2, 263).