Pure Time Preference Theory of Interest #3

The productivity theory of interest is analogous to wages and labor. Employers pay workers for the output their labor makes possible. Similarly, if capitalists provide a capital good, the capitalist must be paid interest commensurate with the increase in output that the capital good makes possible. Murphy holds that Böhm-Bawerk brilliantly refuted this line of reasoning. He quotes Böhm-Bawerk:

"I grant without ado that capital actually possesses the physical productivity ascribed to it, that is to say, that more goods can actually be produced with its help than without. I will also grant ... that the greater amount of goods produced with the help of capital has higher value than the smaller amount of goods produced without it. But there is not one single feature in the whole set of circumstances to indicate that this greater amount of goods must be worth more than the capital consumed in its production. And that is the feature of the phenomenon of excess value that must be explained" (Choice 227-8)

It seems to me that Böhm-Bawerk attacked a straw man of the productivity theory.

"Literally to ascribe to capital a power of producing value is to misunderstand the essential nature of value, and to misunderstand the essential nature of production completely. Value is not produced at all, and cannot be produced. We never produce anything but forms, shapes of materials, combinations of material, that is to say, things, goods" (Capital and Interest 90).

Probably critics of the Marxist notion of "surplus value" contended that "capital produces value." That can be regarded as a shorter way of saying "capital produces things that have value." Böhm-Bawerk's interpretation makes it a straw man.

After great praise for John Rae (Capital and Interest 208), Böhm-Bawerk even chides Rae for conflating physical returns with value returns, protesting that prices would adjust to normalize the exchange value surplus or rate of return, in the technically more productive processes. Rae could hardly have arrived at this correct result since he lacked “the modern theory of marginal utility.” (Herbener, The Pure Time-Preference Theory of Interest 31).

While Murphy defends the time-preference theory in Choice, he apparently had a little different view not much earlier. "Second, Murphy argues that if pure time preference theorists define time preference in terms of satisfactions and not goods, then time preference is neither necessary nor sufficient to explain the rate of interest as defined as the intertemporal exchange rate of goods. This criticism also misses the mark since in the PTPT the rate of interest is not the intertemporal exchange rate of goods. With the intertemporal exchange of money, pure time preference is both necessary and sufficient to explain the pure rate of interest" (Herbener 55-6).

To be continued.