Ep. 26 Capital & Interest in the Austrian Tradition, Part 1 of 3

Bob goes solo by beginning his 3-part series devoted to Capital & Interest Theory in the tradition of the Austrian School. (This is his area of expertise and the focus of his doctoral dissertation.) In this episode, Part 1, Bob explains Bohm-Bawerk’s critique of the “naive productivity theory” of interest, and also reconciles it with the standard approach in modern economics models of equating the real rate of interest to the “marginal product of capital.”
Mentioned in the Episode and Other Links of Interest:

The audio production for this episode was provided by Podsworth Media.

About the author, Robert

Christian and economist, Research Assistant Professor with the Free Market Institute at Texas Tech, Senior Fellow with the Mises Institute, and co-host with Tom Woods of the podcast "Contra Krugman."

5 Comments

  1. Tel on 04/13/2019 at 8:52 AM

    If you take the case where the only good is sheep, and the sheep always reproduce at 5% per annum … presuming sheep are also the unit of account (what else is there?) then not only do you end up with 5% PA real interest rate, but you also end up with a guaranteed time preference of exactly 5% PA. I can prove it like so:

    All the people who own no sheep will die, since no trade is possible and they have nothing to consume.

    Consider a person with time preference of 4% PA, who owns some number of sheep … this person will choose to invest ALL of her sheep at 5% PA real return and then die in the first period due to starvation since she didn’t eat any sheep. This applies just the same for a person with time preference of 4.99% PA or any number less than 5%.

    Now further consider a person with time preference of 6% PA, who owns some number of sheep … this person will not see investment at 5% PA as sufficiently worthwhile, and therefore will invest NONE of her sheep and consume them all in the first period. This person will die in the second period due to starvation, having invested nothing and eaten everything in the first period. Same applies to any person with time preference greater than 5%.

    Thus, the only long term survivors are those who have a time preference of exactly 5% PA and therefore are ambivalent about consumption vs investment. You cannot actually solve the question of how many they invest though.

    I fully concur that this is a highly unrealistic example, and cannot be used to draw generalized conclusions about the nature of interest rates. I’ve been struggling a bit with Tyler Cowen’s book “Stubborn Attachments” … he talks in the introduction about Frank Knight’s Crusonia plant (named after Robinson Crusoe) which also grows at a steady percentage per annum. Using this argument, plus some others, Cowan comes to a conclusion which could be summarized as recommending the lowest time preference possible (I’m being glib, but that’s the gist of it). I conclude that Tyler Cowen invests all his sheep and therefore dies in the first period. To be fair to Cowan, he readily admits there’s always additional nuance in any situation, although he’s often a bit mystical about why the nuance should not then lead us to ignore his recommendation of very low time preferences.

  2. Hippity Hoppety on 04/15/2019 at 11:23 PM

    Bob, I have to say that I love the episodes when you’re flying solo the most. While you have excellent tastes in guests, your ability to explicate through multiple lines of reasoning and your intuition about which aspects of a topic tend to trip people up, help me glean the most from these kinds of shows. Even if I know the topic at hand well, you’ll often give me ways of explaining myself to my friends and family, or new ways to approach sincere debates and discussions.

    Also, your voice is comfy AF, fam.

    • Robert Murphy on 04/16/2019 at 4:27 AM

      Thanks!

  3. John Foster on 04/16/2019 at 2:04 AM

    Great episode, Bob! Two things stuck out for me.

    First, I wasn’t aware of your amazing contributions on interest theory. Wow! So impressive. I wouldn’t have stumbled onto that in a million years.

    Secondly, you praised Samuelson as a very sharp guy. My perspective has been that he was totally out of touch to have said all the ridiculous things he said about the soviet economy. To the degree that economics is supposed to describe something in the real world, he seemed clueless. Are you just being your normal charitable self or did Samuelson bump into reality on occasion?

    • Robert Murphy on 04/16/2019 at 4:26 AM

      Thanks John. About Samuelson, well, Einstein was a socialist. Would you object if I said Einstein was a sharp guy?

      Now in fairness, you could say, “Einstein was a great physicist. You praised Samuelson who was an economist.” So it’s not a perfect analogy, I grant you.

      In any event, yes Samuelson was an extremely sharp guy. He was also totally out of touch. I don’t think those are mutually exclusive, and in fact, in many cases (like Krugman), I think a person can only maintain such wacky views *because* he’s so intelligent (and so trusts his reasoning over “common sense”).

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