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.

Downloads

Download data is not yet available.

Metrics

Metrics Loading ...

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.

References

ANTONELLI, E. Le souvenir de Léon Walras et Carl Menger à travers leur correspondence. Economie Appliquée, v. 6, 1953.

BARRO, J. R.; SALA-I-MARTIN, X. Economic Growth. MIT Press, 2004.

BLAUG, M. The formalist revolution of the 1950s. Journal of the History of Economic Thought, v. 25, n. 2, 2003.

BÖHM-BAWERK, E. V. The Positive Theory of Capital. New York: G. E. Stechert and Co., New York, 1930.

BÖHM-BAWERK, E. V. Capital and Interest: A Critical History of Economical Theory. Libertarian Press, South Holland, v. 1, 1959a.

BÖHM-BAWERK, E. V. Capital and Interest: A Critical History of Economical Theory. Libertarian Press, South Holland, v. 2, 1959b.

BÖHM-BAWERK, E. V. Capital and Interest: A Critical History of Economical Theory. Libertarian Press, South Holland, v. 3, 1959c.

BRAUN, M. Finance behind the veil of money. Liberty.me, 2014.

DE SOTO, J. H. Money, Bank Credit, and Economic Cycles. Auburn: Ludwig von Mises Institute, 2009.

ENDRES, M. The origins of Böhm-Bawerk’s greatest error: Theoretical points of separation from Menger. Zeitschrift für die gesamte Staatswissenschaft. Journal of Institutional and Theoretical Economics, p. 143, p. 291–209, 1987.

FETTER, F. A. The principles of economics. The Century Co., New York, 1905.

FETTER, F. A. Interest theories old and new. American Economic Review, v. 4, n. 1, 1914.

FETTER, F. A. Economic principles. The Century Co., New York, 1915.

FETTER, F. A. Capital, Interest, and Rent: Essays in the Theory of Distribution. Kansas City: Sheed Andrew's and McNeel, 1977.

GARRISON, R. Waiting in Vienna. In: Time, Uncertainty, and Disequilibrium, Exploration of Austrian Themes. Lexington, Lexington Books, 1979.

GARRISON, R. Time and Money. The macroeconomics of capital structure. London and New York: Rout-ledge, 2001.

GLORIA-PALERMO, R. The Evolution of Austrian Economics: From Menger to Lachmann. London and New York: Rout-ledge, 1999.

GLORIA-PALERMO, R. In search of the right tool: From formalism to constructivist modelling. GREDEG Working Papers Series, v. 33, 2013.

HAYEK, F. A. Prices and Production. Routledge: London, 1935.

HERBENER, J. M. Introduction. In: The Pure Time-Preference Theory of Interest. Auburn: Ludwig-von-Mises Institute, 2011.

HOLCOMBE, R. G. Entrepreneurship and economic growth. Quarterly Journal of Austrian Economics, v. 1, n. 2, p. 45–62, 1998.

HÜLSMANN, J. G. A theory of interest. Quarterly Journal of Austrian Economics, v. 5, n. 4, 2002.

KALECKI, M. Macrodynamic theory of business cycles. Econometrica, v. 3, p. 327–244, 1935.

KIRZNER I. K. An Essay on Capital. New York: Augustus M. Kelley, 1966.

KIRZNER I. K. The pure time-preference theory of interest: An attempt at clarification. In: J. M. The Pure Time-Preference Theory of Interest. Auburn: Ludwig-von-Mises Institute, [1993] 2011.

LACHMANN, L. M. Capital and its Structure. Kansas City: Sheed Andrew's and McNeel, 1978.

LEWIN, C. Capital in disequilibrium. Auburn: Ludwig von Mises Institute, 2011.

MENGER, C. Grundsätze der Volkswirtschaftslehre. Wien: Wilhelm Braumüller, 1871.

MENGER, C. Principles of Economics. Glencoe: The Free Press, [1871] 1950.

MENGER, C. Problems of Economics and Sociology. Illinois: Urbana, [1883] 1963.

MENGER, C. Principles of Economics. Auburn: Ludwig von Mises Institute, [1976] 2007.

MISES, L. V. Human Action. Auburn: Ludwig von Mises Institute, [1949] 2008.

MISES, L. V. The theory of money and credit. Auburn: Ludwig von Mises Institute, 1954.

MOSS, L. The emergence of interest in a pure exchange economy: Notes on a theorem attributed to Ludwig von Mises. In: SPADARO, L. M. New Directions in Austrian economics. Kansas City: Sheed Andrews and McNeel, 1978.

MURPHY, R. P. The Austrian subjectivist theory of interest: An investigation into the history of thought. Quarterly Journal of Austrian Economics, v. 4, n. 1, 2001.

MURPHY, R. P. Unapticipated Intertemporal Change in Theories of Interest. New York: New York University, 2003.

PELLENGAHR I. The Austrian subjectivist theory of interest. Frankfurt am Main: Peter Lang, 1996.

REISMAN, G. Capitalism. Laguna Hills: TJS Books, [1990] 1998.

ROBINSON, J. The accumulation of capital. R. D. Irwin, Homewood, 1956.

ROTHBARD, M. N. Man, Economy, and State with Power and Market. Auburn: Ludwig von Mises Institute, [1962] 2009.

ROTHBARD, M. N. Time preference. In: J. EATWELL et al (eds). The new Palgrave. A Dictionary of Economics. Macmillan, London, 1987.

SCUMPETER, J. A. History of Economic Analysis. Oxford University Press, New York, 1954.

WOODS JR, E. T. Why the greenbackers are wrong. Mises Daily Article. Available at: http://mises.org/daily/6391/Why-the-Greenbackers-Are-Wrong. Acessed: Mar 29 2013.

Downloads

Published

2021-12-20

How to Cite

1.
Hagedorn H. A Praxeological Theory of Interest Rates. MisesJournal [Internet]. 2021 Dec. 20 [cited 2022 Dec. 2];9. Available from: https://revistamises.org.br/misesjournal/article/view/1431

Issue

Section

Special Issue 2021