Jeffrey Herbener’s PTPT book introduction

Professor Herbener’s introduction to The Pure Time-Preference Theory of Interest is excellent. Not only does it have very quotable passages (see below), but it details the fundamental differences between Böhm-Bawerk’s theory of interest and that of Frank Fetter, siding with the latter. Herbener argues that Fetter’s conception of time preference and interest is in the vein of Mengerian economics, and that Böhm-Bawerk’s is a departure from Menger. He also points to the influence of John Rae on Böhm-Bawerk in understanding time preference as an agio on present goods over future goods, instead of present satisfactions over future satisfactions. I think this distinction is important for responding to contemporary criticisms of PTPT.

I felt vindicated when I read Herbener’s take on Mises crediting Böhm-Bawerk as the foremost among time-preference theorists:

As the excerpt from Human Action, included in this volume, shows Ludwig von Mises accepted Fetter’s PTPT of interest, although he failed to give Fetter proper credit in developing the theory. In Mises’s view, “economics owes the time-preference theory to William Stanley Jevons and its elaboration, most of all, to Eugen von Böhm-Bawerk.” Fetter’s contribution was in helping to perfect the theory. “It was on the foundation laid by him [i.e., Böhm-Bawerk],” Mises wrote, “that later economists—foremost among them Knut Wicksell, Frank Albert Fetter and Irving Fisher—were successful in perfecting the time preference theory.”

…because I had the same thoughts when I recently read the same passages in Human Action. This shouldn’t discredit Böhm-Bawerk’s other notable contributions, just the popular view that he was a great progenitor or expounder of PTPT as laid out by Mises or Rothbard.

Fetter’s “Interest Theories, Old and New” is in his Capital, Interest, and Rent compilation edited by Murray Rothbard and in Herbener’s book, The Pure Time-Preference Theory of Interest. Fetter shares Herbener’s opinion of Böhm-Bawerk and Fisher: “From the moment Fisher begins his first approximation he takes his standpoint in the money market and supposes an existing rate of interest to which rates of time-preference of individuals are later brought into conformity. His treatment throughout is of the actuarial, mathematical type, concerned with the explaining and equalizing of incomes which are assumed to be present.” Fisher’s (early) work on interest was circular in this regard, as was Böhm-Bawerk’s, but for different reasons.


I mentioned at the beginning that there are some very quotable passages in Herbener’s introduction. Here is one example (brace yourself for a long quote–I promise it’s worth it):

The thrust of Menger’s approach, in contrast, is to discover the causal laws of human action and integrate them into a single coherent system, a body of true propositions that explain the underlying, universal causes of all human action as well as those for each relevant sub-category of human action, consuming, producing, buying, selling, and so on. The wellspring of all economic theory is the reality of the human condition. As a finite being, man makes a distinction between ends and means. He cannot attain his ends by an act of will alone, but must apply means to attain his ends. Man lives in an orderly, but finite world. Using means produces only limited effects in attaining ends. Endowed with reason, man is able to perceive the causal connection between the use of means and the attainment of ends. Any action toward the attainment of an end requires surrendering the attainment of another end with the same means. And any action using a set of means requires foregoing using another set of means to attain the same end. Action, therefore, requires choice. As a purposeful being, man selects what he perceives to be higher-valued ends to pursue and what he perceives to be lower-valued sets of means to employ. Choice, therefore, requires a judgment of the mind. Since attaining the end is the purpose of an action, the value a person attaches to the attainment of the end is primary. A person attaches only derivative value to the means used in action since they are merely aids to the attainment of the end. Means have no value independent of the value a person attaches to the end they help attain. The human mind imputes value to the means according to the aid they render in attaining a valuable end. The technical properties of each of the means that combine to attain an end can be valued differently by different persons or by the same person at different times and, therefore, have no causal impact on choice and action independent of the judgment of the mind.

As a temporal being, man distinguishes between sooner and later. He can, therefore, judge the value of attaining an end sooner differently than attaining it later. Just as the principle of preference is implied by man’s finitude, time preference is implied by his temporality. [*] Temporal beings prefer the satisfaction of an end sooner to the same satisfaction later. Man places a premium on present satisfaction over future satisfaction. Since time preference refers only to the difference in value of the satisfaction of an end sooner instead of the same satisfaction later, the discount a person places on the future will be uniform across all actions with the same intertemporal structure. Moreover, the discount applies to all actions regardless of when a person chooses to undertake any one of them. In choosing to take an action later, a person is demonstrating that the value of the action in the future exceeds its value in the present, even when the discount of the future is applied. His temporal choice, then, conforms to the general principle of action, that he chooses a more-highly valued alternative and foregoes a less-highly valued one. He economizes his actions across all aspects of action subject to choice: ends, means, place, and time.

In short, the human mind integrates all the factors affecting human action into a systematic whole, reconciling the objective, technical features of the world, including time, through judgments of value in a way that renders the highest satisfaction of ends.

The market economy performs this integration for society. Prices are determined by the underlying preferences of buyers and sellers. Objective factors have no independent effect on prices, but influence prices only through preferences. Prices of consumer goods are directly determined by the preferences consumers have for them as expressed in their demands for the goods. Prices of producer goods used to produce each consumer good are indirectly determined by consumer preferences as they generate revenue for entrepreneurs to justify the demand entrepreneurs express for them. Entrepreneurs pay each factor of production the monetary value of its contribution to production. If the factor payment is made sooner than the revenue is received from the sale of the output produced, then the payment is discounted because of time preference. This discount of future money relative to present money is interest and determines the pure, or time preference, rate of interest. Because all exchange of present money for future money of the same time structure involves time preference, the pure rate of interest is uniform across all such intertemporal exchange. It follows that all present goods that generate future money will have their prices determined by discounting the future money by the rate of interest to obtain the equivalent amount of present money. This process of capitalization results in a uniform rate of interest as the difference between the present money spent to acquire factors of production and the future money obtained from selling the output produced. Prices, so determined, are the basis for economic calculation which permits entrepreneurs to appraise the lines of production and investment that people find most valuable.

*My only critical comment about this passage is that Herbener sort jumps from just one premise in the logic of time preference (we exist in time) to the conclusion of time preference (we prefer sooner to later) without giving the other premises or careful reasoning. Herbener does a cannonball into the deep end of the pool instead of carefully wading in. I try to connect the dots here.

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