A Praxeological Theory of Interest Rates

Authors

DOI:

https://doi.org/10.30800/mises.2021.v9.1431

Keywords:

Interest Theory, Praxeology, History of Economic Thought

Abstract

This paper starts with the observation that the pure time preference theory leads to conflicting views concerning the effect of changes in productivity on the rate of interest. Subsequently, it reviews parts of the interest literature and concludes that the pure time preference theory does not qualify as a praxeological theory. Then, the paper combines Hülsmann’s theory of interest with the subjectivist capital theory of Lachmann and Kirzner and provides a praxeological theory that explains the rate of interest. The key to that theory is that cost reduction through the use of fixed capital must always be understood as relative to the costs of labor which the capital replaces. Since labor is non-specific and the price of labor therefore also constitutes the production costs of fixed-capital goods to a certain extent, the use of fixed capital necessarily entails a business surplus somewhere in the economic system. Since this surplus cannot dis-appear it qualifies as interest income. The size of this income is such that the interest rate corresponds to the marginal rate of substitution between labor and fixed capital as embodied in entrepreneurial actions.

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Author Biography

Hendrik Hagedorn, University of Münster – Münster – Germany

Dr. Hendrik Hagedorn earned his doctoral degree in economics under Prof. van Suntum at the university of Münster, Germany. He is also a graduate physicist, a former summer fellow at the Ludwig-von-Mises Institute in Auburn, and a former fellow at Graduate Center of the German Institute for Economic Research in Berlin. In 2013, he won the Don Lavoie Memorial Essay Competition. From 2016 to 2018, he was a college professor for economics at a business school in Berlin. Currently, he is a political advisor in the German parliament. His research interest include Austrian economics, praxeology, economic modeling, and epistemology.

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Published

2021-12-20

How to Cite

1.
Hagedorn H. A Praxeological Theory of Interest Rates. MisesJournal [Internet]. 2021 Dec. 20 [cited 2024 Oct. 13];9. Available from: https://revistamises.org.br/misesjournal/article/view/1431