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Ep. 199 Jeff Herbener and Bob Murphy Discuss the Pure Time Preference Theory of Interest

Jeff Herbener is a Senior Fellow with the Mises Institute and an economics professor at Grove City College. At the 2021 Austrian Economics Research Conference, Jeff presented a defense of the pure time preference theory of interest, and mentioned Bob’s critique of it. This episode is a very informative discussion of their views.

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, Chief Economist at infineo, and Senior Fellow with the Mises Institute.


  1. Not Bob on 05/10/2021 at 2:02 AM


    One point that came to me when you were describing the “roundabout” way of improving things. I don’t know if this is necessarily an “empiric” point. Or at least it’s easy enough to convert it into a non-empiric one, I think.

    The way you formulate it (not sure how Böhm-Bawerk originally said it) is basically “longer processes happen to empirically yield more productive outcomes, aww shucks!”

    But think about it this way. List all possible roundabout-and-otherwise production processes known to this person on a diagram where X marks the time taken and Y marks the productivity.

    Now you can cut off the diagram after X passes the time somebody has, e.g. he’s very thirsty and about to die and cannot invest 3 months into plumbing to his hut. He can only choose the production strategies that will allow him to make the deadline (death by thirst), say 1 hour. So he’s probably going to use his hands in this specific example.

    But even in the remaining “enough time” segment, there are tons of production strategies that are less productive than the “best one” with any given amount of time.

    Just to list an absurd example, say the person has 3 months. So he invents a shovel, digs a trench.. and then proceeds to still use his hands to carry water. Took 3 months, still only as productive as the most basic zero-investment strategy.

    In a sense there is an efficient frontier.

    So it’s not that longer processes empirically are more productive. It’s that rational actors will choose the most productive (as perceived by them) production strategy they know of that will fulfill their time requirements. And if they have 3 months until they need the water, why would they not do the productive trench method instead of walking around with their hands clasped for 3 months to get a fraction of the results?

    This also fits nicely with your “time preference is not special” idea, which I really like. Substitute any other resource for time. A man with wikipedia and a forge might craft plumbing. A man who also has a huge amount of time, but lacks the knowledge and the forge, might dig a trench with a rock. A man who lacks a rock might use his hands forever.

    “A rational actor will choose the most effective roundabout of production that will still meet his resource constraints” does not seem empirical to me. I don’t know if it is “calculation” or “a priori” or what category.

    Just a thought I had while listening.

    Another thought: doesn’t uncertainty already explain time preference? I prefer the apple today because you might breach your contract, I might get hit by lightning, apples might all explode, or my tastes might change. You only touched on it briefly by mentioning the 4 things that make up interest. But I’m not sure you can really take uncertainty out of it. How would you take uncertainty out, hold the universe equal? No physical damage can occur to any goods, and no actors can change their preferences? It’s absurd to even think about.

    So I don’t know if we need more than “uncertainty” to explain time preference.

    • Evan R on 05/15/2021 at 11:04 AM

      Phenomenal episode! I can’t say I have as deep an understanding as the two of you, but enough to appreciate this contribution to the Austrian school. Thank you for all your hard work!

      • Evan R on 05/15/2021 at 11:09 AM

        My previous comment was meant for Bob and Jeffrey Herbener. I apologize for any confusion. I don’t comment on things often and clicked the incorrect reply.

  2. Tel on 05/12/2021 at 11:13 PM

    I remember we have argued long and loud over interest rates and time preference on the CbRPM blog, and this is a summary of the position I got to.

    Time preference applies to goods (no different in principle to proximity preference) but depending on the goods that will not be a simple function, nor will it reliably be a monotonic function. My example is thus: you are expecting a visit from the Queen in three month’s time and you know she is expecting to be served fresh strawberries and cream. You don’t want those strawberries delivered today, you want them first thing in the morning, right before the Queen shows up. Yes, there is a time preference function but the preference is very high at one particular time, and low at other times … because there is one particular time when you need the goods. This may sound like a contrived example, but if you think about making a sponge cake with strawberry and cream on top then it’s nonsense to say, “Oh I’ve got this more roundabout process to make the cake” because such a process does not exist! You cannot make the choice based on your savings preference, because only one process is available to choose from and the timings of that process are strict.

    These type of limitations happen all the time in industries such as food delivery, but also in the service industries: Would you like all of your haircuts delivered today? What about phone calls … would you prefer to make all of your future phone calls today?

    Let’s get to money then. Here’s the modern standard desirable monetary properties: Fungible, Durable, Divisible, Portable, Acceptable, Uniform, Scarce.

    Aristotle had only four: Durable, Portable, Divisible, and intrinsically Valuable.

    Those are the same properties that force time preference functions into a shape that we are more familiar with, regarding interest rates. Because money is durable the time preference function becomes monotonic and decreasing. Because money is divisible the time preference function will be smooth. Because money is fungible calculating a ratio of money divided by money is meaningful, in the sense of Dimensional Analysis (i.e. units). Because money is portable lenders and borrowers gravitate towards a marketplace where they decide on a general consensus about prices, out of which arises interest rates. Because money is scarce the supply of future money can be accurately estimated, therefore a marketplace that judges future prices in terms of present prices can operate efficiently.

    One of the things that humans do is take to take the goods we can find, and convert those into other goods, which have properties more similar to money. Think about it … a lot of raw fish gets converted into tinned fish, but why would anyone do that? Well,. tinned fish is much more durable than raw fish, and if the tins are all the same size then it becomes uniform and fungible. If the tins are of a convenient meal size then for practical purposes it becomes divisible too. We even have a name for this process: “commoditization”.

    Using this principle, it becomes possible to compare any goods against the standard desirable monetary properties … in order to figure out what makes those particular goods special or unusual. Let’s look at electricity as a commodity … in the early days the biggest struggle was to get it uniform, and we have the AC/DC wars, and famously AC won that because of Tesla and his motor and transformer designs. What’s the single biggest remaining bugbear of the electricity market? As mentioned in earlier discussions on the Texas blackouts, the thing that makes electricity so special is lack of storage … the power in the wires is very portable but not even a tiny bit durable. What’s the biggest hot technology related to the electrical power industry? Batteries and other electricity storage. People desire for electricity to operate like money, right now that’s not possible, but the big technology effort is to push it in that direction.

    There’s another sneaky monetary property, which people understand but typically does not turn up in the standard list … that is Liquidity and we can generalize this by thinking of it as the speed of deployment of the resource, coming out of storage. Consider the tinned fish, and suppose I get hungry at completely random times and I cannot know in advance when I will get hungry. I can grab a tin from the shelf and start eating in a brief moment, so the tinned fish has excellent liquidity. You get the same problem with electricity generation, looking at dispatchable power (e.g. gas turbine starts and stops quickly) vs non-dispatchable (e.g. switching off a nuclear power station is at least a week’s work, therefore it’s easier to run them all the time).

  3. Pedro Jorge on 05/13/2021 at 6:04 PM

    Great episode! Could you please provide the reference to where Fetter most explicitly refers to his theory as a calculation theory?

    • Robert Murphy on 05/13/2021 at 8:00 PM

      Pedro, Fetter called his approach the capitalization theory. It was Jeff Herbener who dubbed it a calculation theory. I don’t know exactly where to point you on this, because I need to go reread Fetter myself. But presumably it’s in here somewhere.

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