 In these first three days, we've covered a lot of ground. We've talked about the causal laws of human action with respect to the physical laws that exist in the relationships between different means in the capital structure and those means in the ends that we're striving to attain in action or the structure of production. We talked about the laws of valuation of means and ends, how we impute value and what the laws of utility imply. We've talked about appraisement and economic calculation so that the efficient decisions can be made in the Division of Labor about production. And in this talk, we want to discuss the laws of the valuation of time. And then related to that, of course, the principles or laws of appraisement that is economic calculation, pricing with respect to time. Now, the first point to make, this is a crucial point that often overlooked in this discussion. It was emphasized most dramatically by Frank Federer, who was one of the pioneers in the pure time preference theory of interest, is that when we think about valuation with respect to time, there are two different aspects of valuation with respect to time. One of them will call the timing of an action. And the other is time preference. And while these two are always going on when we're thinking about our action with respect to time, they're certainly conceptually distinct. And it's important for us to see the distinction and then the lines of logic that follow from that distinction. So with respect to timing, what we'll point out is that when we think about the timing of an action, what results from this with respect to appraisement is what we might call temporal prices. And we'll speak about this first. And then with respect to time preference, what we get, of course, are inter-temporal prices. The rate of interest. Okay, so let's start with the temporal aspects of action. This again refers to how do we choose the timing of an action, given that we're considering some particular action to take? How do we decide when in the stream of time to undertake the action? We know as Mises famously put it, that time is an irreversible flux. Time just marches on, right? And we can't allocate time as we allocate other means. We can't just store it up and apply it to a particular end whenever we want, like we save up money and then we buy a new car or something of this sort. So when we think about allocating in an economizing way with respect to time, since we can't gather up time and allocate it at any particular moment, what we can do is place our action in the stream of time, so to speak. Now, this is relevant anytime in action, anytime we assess in our mind, we make a judgment in our mind, that an action might in fact have a different value depending upon when we take it. So a simple illustration of this is my wife and I have a wedding anniversary on August 17th. And if we celebrate our wedding anniversary on August 17th, it has more value than if we celebrated on December 1st. It matters to some degree how close to August 17th it is that we celebrate. So it's the same action, it's the same activity that we would engage in in any case, but the timing matters. And therefore it seems sort of obvious, right, that we always have a tendency to place our actions in time where the value is the greatest. We could say something like this, right, the marginal utility of any particular good can vary depending upon the moment we use it. Not only does it vary from one action to another, we take water and we drink it or we water plants or whatever, but it matters when we drink the water. Do we drink it at nine in the morning or 10 in the morning or do we drink it tomorrow or the next day and so on, so on and so forth. So to economize our actions with respect to the timing of the action, we would attempt to place our action in time where the marginal utility is the greatest, right, where we get the greatest value, this is the idea. Now with respect to appraisement, of course, what this leads to when we begin to engage in exchange on the basis of these different values that we perceive accruing to the same good or the same action at different moments in time, what we get are what are called forward prices. These emerge in futures markets, right? So what happens is today two parties who disagree perhaps because they're speculating about the value, the future value, the value on December 1st of some particular good, let's say oil, can make an exchange today to agree to trade oil at a stipulated price in the future, that's called a forward price. And then of course the market will clear, we'll have speculators on both sides of the issue. They think that the December 1st price of oil will be higher than the spot price today and then the other speculators think it'll be lower. And the market will clear the quantity demand and quantity supply of these speculators is the same. And of course this forward price could be either higher than the spot price or could be the same as a spot price or lower, right? There isn't anything, there's no law of economics that would say that futures price in the futures market, the price of oil to be delivered on December 1st must be higher than the spot price today. I mean, I know there's some economists that argue that it does, but you just look at the evidence, right? It doesn't seem to comport with their claim. Sometimes future prices or forward prices are lower than spot prices, sometimes equal. So this is one dimension of valuing and quite apparently the same sort of economizing result comes from having appraisement of these forward prices as it does spot prices. So if the forward price of oil to be delivered again on December 1st is $150, then entrepreneurs will begin to reallocate resources to bring a greater supply of oil to the market on December 1st than currently, right? They'll ramp up production or they'll store existing oil or however to reallocate it to its higher valued moment in time. Okay, now let's turn to the intertemporal aspects of action and here is where we get to the interest rate and time preference. So let's begin with time preference. All economic reasoning remember begins with our subjective values. Time preference we define this way. Time preference is the satisfaction of an end sooner is preferred to the same satisfaction attained later. So for a given satisfaction that we could attain we prefer to attain it sooner as opposed to later. Now time preference just like the concept of preference where we say in action we always have a prep rate, we value one option relative to another and we prefer one over the other and select the preferred one. Time preference just like preference is a reflective fact about acting. Time preference is not something we deduce about action. Time preference is a basic feature of acting. In fact, all temporal beings have time preference. It's just in the nature of temporal existence that a temporal being distinguishes between sooner and later and prefers sooner. Just like because we're finite beings we distinguish between more of a good and less of a good and we prefer more. That's not a deduction, right? That's a basic principle. That's a reflective fact about acting. I say this because oftentimes in this debate about time preference, one side argues that, well, time preference can't be true because after all we can come up with various deductive inferences that seem to contradict it or we can come up with contrary examples of it or something like this. But clearly this is all beside the point. This isn't getting to the character of what we mean when we use the term, what we mean by the concept of time preference. Time preference is a fundamental praxeological notion. Okay, now, having said that, let me just make sure, again, we see the import of this. As Mises points out, time preference then is not a psychological condition. Waxes and wanes, right? Time preference is not the disutility of waiting or the discomfort of anticipation or something of the sort. That, again, is just a particular condition of particular people when they act. Some people have disutility of waiting and some people don't. Some people have it to a greater degree, some people don't. This isn't what we mean by time preference. Time preference is not the psychological disposition of a person or doesn't come from the psychological disposition of a person. Mises points out that it's also not physiological. Time preference doesn't exist because we have physiological needs that have to be met or we die. That isn't what we mean by time. Time preference has a rise because of that. As he points out, we have time preference even for those needs, right? And so this doesn't, well, this is just a different aspect of acting to say that we have physiological needs. Now, because time preference is a basic feature of acting, as Mises points out, it's ubiquitous in all actions. It doesn't matter what the circumstances of our action are. It doesn't matter how old we are, young we are, rich we are, poor we are. Doesn't matter if we're Robbins and Caruso or if we live in an advanced division of labor society, everybody always has time preference. Everybody always prefers a given satisfaction sooner to the same satisfaction later. Mises goes on to point out that the later in time that a satisfaction is to be attained, the heavier the discount. This must be true because if not, then we could have infinite or indefinite time horizons. We don't, in fact, have indefinite time horizons, right? Again, because we're temporal beings, we tend to discount more heavily a satisfaction to be acquired in 50 years as opposed to a one to be acquired in, say, five days. Okay, now let's look at some of the implications of time preference. Once we see that time preference is this fundamental principle involved in all decisions of acting, what does it imply? Well, of course, one thing that it implies quite obviously is that longer processes of production must generate more valuable goods. Otherwise we would not choose them, right? Or to put the point the other way around, given that we have a shorter production process that generates the same value of output as a longer one, we'll choose the shorter one. Notice this means that in every situation of acting, setting aside errors that a person makes, entrepreneurial errors, a person has already adopted all of, or in society, we've already adopted all of the shortest, most productive production processes. This only leaves longer, more productive production processes for us to adopt. Why do we do this? Because of time preference. If we didn't have time preference, then we wouldn't engage in the production of consumer goods in shorter production processes as long as longer, more productive production processes were available. Think of an example of this. If we really didn't care about sooner versus later, and we didn't care how much later, then as soon as Adam and Eve come out of the Garden of Eden, instead of setting about trying to quickly grow food and set up a little hut or make animal skin clothing or whatever, they would have set on the process of producing, let's say rocket ships or modern automobiles or air conditioning or something of the sort. Well, why not, right? I mean, that's a more valuable good, certainly to have an office building or one of those material beaming devices that they have in Star Trek. Maybe someday we can produce these. Well, why not, let's just set out on those now, right? Because if we don't have time preference, and we don't care how much later it is in time that we're to receive the goods, this is the sort of thing that we would do. Okay, now let's take up this question of exceptions to time preference. Again, oftentimes people argue this way. They argue about the implications or the exceptions to time preference. Trying to poke holes in the existence of time preference. And Mises again deals with this where he points out that there can't be any exceptions to time preference. Any more in human action, any more than there can be exceptions to preference. These two concepts are analogous to each other. They're both fundamental, praxeological facts about acting. Nobody can ever act in a way that contradicts their preference. Why? Because we define preference as that judgment of the mind by which a person chooses their course of action. See, so you can't come up with counter examples, right? With exceptions. And you can't do this then for time preference either since time preference is embedded in the nature of finite existence. You can come up with clever sounding cases, but they're not real exceptions. And Mises gives a couple of these that are in the literature. One is, he says, suppose we have a guy and he gets two theater tickets for the same evening. Both for Friday evening, let's say. And he says, oh, I wish that second theater ticket was for Saturday. And people say, oh, see, he prefers the future good, right? He, future good is worth more to him than the present good. And Mises says, well, no, no, that's not the situation at all, right? The situation is he has two mutually exclusive options and he has to give one up. So that's not even a time preference issue. Then the other case is ice in the winter and ice in the summer. If you read through human action, you find this alleged exception to time preference. In the winter time, people prefer ice in the summer. And therefore this contradicts time preference, right? They prefer the future good to the present good. When time preference says we always prefer the present to the future, right? Or sooner to later. Now, I don't think Mises's way of treating this issue is satisfactory. So let me just give you the Frank Fetter way, which I think is more logically sound. Fetter says, well, look, here, in this case, what we've done when we think about this problem of comparing the, we have a person who's comparing the value of ice that he possesses, let's say, right now in winter, to the ice that he may have in summer. What we're doing is we're conflating the two different valuing aspects of time. That's the problem. That's why this seems like an exception to time preference, right? We're conflating the timing of the action with time preference. They're both involved in this action. And the timing of the action, that value of having ice in the summer, because the timing of using ice in the summer is more valuable to us, is overwhelming time preference in this example. Of course, in the winter we value ice in the summer more than we value ice in the winter, right now. But that's because ice in the summer has a greater value just like celebrating my anniversary on August 17th has a greater value to me than on any other day of the year. This again is no exception to time preference. Time preference just says, we set aside the timing of action and we look just at the distinction between sooner and later for the same satisfaction, then sooner is always preferred to later for the same satisfaction. So this is how praxeologically we would deal with that. Alleged exception. The third case is the case of the miser. So some people say, well, look, don't we have people who actually exhibit sort of zero time preference? What about Scrooge, right? He just sits and never gets it. He always counts his money, hoards it up and plays with it and so on and so forth. And he never spends it. He never actually engages in any consumption. Isn't that therefore an exception? And as Mises points out, well, okay, Scrooge has low time preference, right? But he doesn't have zero time preference. He still consumes in the present. It's not like he values future satisfaction over present satisfaction and therefore delays all of the attempts to get satisfaction into the future. No, he still eats his gruel and sleeps in his straw bed or whatever and tries to minimize all of his expenses to hoard up more gold. Okay, so having dispensed with that, let's get to the rate of interest and see how the argument runs with respect to the rate of interest from time preference. So time preference manifests itself in what Mises calls a regionary interest or what we might call the pure rate of interest. This is Rothbard's phrase. This is the premium on present money when present money is exchanged for future money or we can just as well say the discount on future money. So the claim here is that the interest rate is just a manifestation of our preference for sooner versus later. The manifestation is that present money, a given amount of present money commands a premium over the same amount of future money with equal purchasing power. We'll mention these conditions in a minute. Okay, if we wanna look at a schematic for this, it would look as follows. Now part of this we did on Monday. So this top part is just what we did on Monday. So I just reproduced this. So we have preferences for goods and then we have demand and supply for some consumer good. And then remember, once we have demand and supply for the consumer good, we get the market clearing price of the good. And then that price for the good generates revenue for the entrepreneur who can then evaluate the marginal revenue product of his factors of production. He does this remember by assessing the marginal physical product of the factor, how much additional output does the factor or unit of the factor produce and then how much additional revenue does selling that output generate? And then his demand, the entrepreneur's demand for the factors based upon that extra revenue that's being generated. We took the Derek Jeter example, right? He generates $14.7 million. Well, that's a discounted value of what he generates. That's his marginal revenue product, the extra revenue he's generating. And remember, we said that then is a determining factor of the rental prices of factors of production once we introduce the interest rate. So remember the, we said the rental price of a factor of production is the discounted marginal revenue product of the factor of production. But you'll notice that the interest rate comes from a different line of cause and effect than the one up here. This line of cause and effect includes the physical and value productivity of the factors of production, the marginal revenue product. But the time preference line of cause and effect determines the interest rate. And then the interest rate and the value productivity elements combine to give us the rental price of the factors of production. Then we add up the rental prices, we get capital value. So we've covered some of this before. The point, again, of putting this schematic up is to see, well, there are two things in this, that the interest rate is determined separately from the productivity of the factors of production. It's determined just by time preference. This is the argument, the argument of the pure time preference theory of interest. The productivity of factors of production is up here in this line of cause and effect. It influences the marginal revenue product of the factors, the productivity of the factors. The interest rate is separately determined. In other words, it isn't determined by the productivity of the factors of production. That's what's being argued here. Now, the second thing to notice here, and we'll get to this more detail in just a minute, is that, as we said, time preference is manifest in demand and supply of present money for future money. It's not manifest in the demand and supply of present goods for future goods. In fact, present goods don't trade for future goods intertemporally. As we spoke about before, if you want to trade with respect to the forward price value of future goods, you don't take your, a forward price is not taking the good you have today and trading it intertemporally with someone else. The two parties agree today to trade the good in the future at a price they agree upon today. Neither one of them has the good. They're not intertemporally trading the good. This is the point, right? So this happens only with money. We know this happens with money because we see it in market, right? This is what in fact happens in intertemporal exchange in markets. So we have lending going on. Lending occurs in money, not in goods. We'll see why this is important as we go through the discussion. So we say this explicitly, right? It's demand and supply of present money and that generates the rate of interest. Okay, so the argument here is this about this idea of present money. Just like in my example before, if we think about, this is the ice in winter and ice in summer, if we think about intertemporally trading goods, we talked about intertemporally trading oil, taking present oil and making a contract with somebody today to exchange our present oil. We give them the present oil and they give us back a certain amount of oil in the future at an exchange ratio we agree upon today. That exchange ratio between the exchange of present goods could be higher, the same, or lower than the spot exchange ratio, the one-to-one exchange ratio that exists between a barrel of oil today and a barrel of oil tomorrow because that intertemporal exchange would mix again these two dimensions, the timing of the action with time preference, just like my ice in winter and ice in summer example. We can't get a pure time preference expression when we intertemporally trade goods, but we can when we intertemporally trade money. And again, we know this is true because this is how it's done, right? We see all intertemporal trade is in fact in money and present money always commands a premium over future money. We're talking about in market exchange, right? Not when the bank of Japan pays banks to take present money, not when the government subsidizes the trade, but in actual trade. Okay, so this is how the pure rate of interest then emerges as a trade of present money for future money and this pure rate of interest then would exist in any exchange of present money for future money. This includes as we mentioned on Monday both the credit markets where a credit transaction is made or there's an actual contract to stipulating how much money is lent today and how much will be paid back in the future. These credit transactions go into consumer loans and producer loans, the basic division. And then as we pointed out also in the time market that is in the trade of present money for future money, there is the entrepreneur, the capitalist entrepreneur advancing funds to the owners of the factors of production in all of the production processes of the production structure. So the whole production structure is also part of this exchange of present money for future money. And then as we mentioned again on Monday it commands therefore a rate of interest. Now with the other point we wanna make about this since we covered it on Monday we wanna go back to the details but the other point here is simply to notice once again and we'll see why this is important when we get to the end and we discuss the enemies of the pure time preference theory that interest will exist in actions where there isn't any productivity, there isn't anything being produced or any productivity of any of the factors whatsoever. Interest is also earned in credit markets and there is no productivity, right? Nothing's being produced, you're just taking present money I'm taking $1,000 and I'm lending it to some guy and he's paying me back $1,050 in a year. So once again it seems remarkable that someone would try to build an interest rate from the grounds that the interest rate is some sort of a manifestation of the productivity of the factors of production, the productivity of capital or some other such claim. Remember as we pointed out on Monday what happens actually in these factor exchanges is that the capitalist entrepreneur bids the factor prices because of competition up to their discounted marginal revenue product. That's what he pays his factors of production. Now when he sells his output he earns the full marginal revenue product. In other words, he's earning just an interest return. He's advancing money to the factor owners and then earning the discounted, the discount in the discounted value of the marginal revenue product. And again, this wouldn't depend upon physical productivity, right? If a factor of production is twice as productive an entrepreneur will still only earn the interest rate when he buys it and then gets its productivity in the revenue when he sells his good. He'll just earn the price spread or the rate of interest. This pure rate of interest tends to be the same everywhere in all production processes and loans, credit contracts that have the same time structure. This is because of arbitrage. So if there's any differential earning to be acquired by shifting capital funding away from one line of advancing money to another where the interest rate is higher then the arbitrage process will eventually eliminate the price differential just like it does in all markets, right? And so the process of the market brings about uniformity of the pure rate of interest. Notice again, just to say this one more time to head off some of the arguments against the pure time preference theory. The rate of interest is not determined by demand and supply in credit markets. It's determined by time preference which then manifests itself in the credit markets and the rate of interest is not determined by, or it's not determined in the capital markets by saving and investing. Once again, it's time preference that determines both the inter-temporal rate of exchange between present money and future money that's invested into production processes and the degree to which people engage in saving and investing. It jointly determines these things. In the same way that preference jointly determines the price of a good and the amount of the good traded in markets. There's not like a separate causal factor that determines the volume of the thing being traded. Now it's determined by demand too, by demand and supply too. Okay, now let's just think again to head off objections. Let's just think about how interest plays a role as a source of gross profit or net income. Because up to this point, we've only been talking about interest as a source of net income or gross profit for the entrepreneur. But as Rothbard points out in Maneconomy and State, this gross profit or net income that's earned by the capitalist entrepreneur has actually four sources. So we can't just look at the net income statement of an entrepreneur and say, well, all of that is interest. This is the point, to put it differently. If you look at different entrepreneur's net income statements, they'll show wide variation in the amount of net interest, even if we standardize it by the amount of capital they've invested into these processes, right? But we said the rate of interest is uniform. So how can this be? Well, this can be because the interest that's being earned, the interest return in net income is only part of net income. The other sources of net income are profit for entrepreneurial foresight. So sometimes entrepreneurs earn profit by better anticipating demands and supply market conditions than their rivals. Entrepreneurs can supply labor into their production processes, in which case part of their net income would be wages, because they're not paying somebody to do this job and they're still earning revenue because the job's being done and so that wage would show up in their net income. And then there are also quasi wages that are earned from the supply of entrepreneurial leadership in an enterprise. This is the idea that an entrepreneur not only would contribute his own productivity if he supplies labor, he has his own marginal physical product, marginal revenue product for his own labor, but he can actually increase the marginal physical product. He can increase the productivity of the people around him. Whereas if you replace that entrepreneur with somebody else, if you take Steve Jobs out of Apple and you replace him with somebody else, what happens? Right? We know what happens because it's, because we've gone through this a few times. Apple gets, I mean, jobs get sick, Apple's stock goes boom. Well, this is because jobs, it's not just because of his entrepreneurial foresight, right? It's also because of his leadership ability, some for whatever reasons, when Apple's heading up things, other people work more productively with him. He gets people to work more productively with each other or whatever it is that he's able to do. And so that too will show up in net income or in the gross profit of the enterprise. Okay, now let me just mention another nuance here. And again, we're not going into this in any detail. We just want to mention this so that you see what we're speaking about when we talk about time preference is just this pure rate of interest, right? We're just talking about the interest return in gross profit. We're not explaining all of gross profit. We're not saying that time preference explains all of gross profit. It just explains the interest return. Well, same thing here. We're not saying that time preference explains every component of the market rate of interest. We're saying that time preference explains the pure rate of interest. It explains a component, we might say the fundamental component of any market rate of interest. But in addition to that, a market rate of interest will have an entrepreneurial uncertainty component to it as well. So rates of return, right? Return that's being earned in high risk ventures will be higher than, in order to attract the capitalists, will be higher than in ventures where there's a lesser degree of uncertainty. It will be different, right? We'll get variation in the interest returns between different endeavors depending upon the entrepreneurial uncertainty associated with this endeavor. I might add that this is part of the, this is part of the, or one illustration of this would be Bob Higgs's theory of regime uncertainty that he brings to bear in explaining the duration of the Great Depression. Where he points out that, the capitalist entrepreneurs who are sitting on the sidelines not investing in the Great Depression because of the greater degree of uncertainty that was created by the flux of government programs, right? All the new deal monetary takeovers of the Roosevelt administration. And in order to get them to invest, they would have had to have much higher rates of return which weren't forthcoming, right? So they just sat on the sidelines. This is the idea. There's also a price premium. The price premium refers to canteon effects when there's a monetary inflation. When there's a monetary inflation, Richard Canteon pointed out that there won't be a proportionate effect on the prices of all goods synchronously that the prices of some goods will go up to a greater degree, like in our last boom bus, the housing prices, right? Go up to a different higher degree than other prices did. And some prices will go up sooner in the process and others only later. Well, if you're an entrepreneur in the construction business and the boom starts, your prices go up disproportionately. And so your net, your return that you're earning here is disproportionately high, right? This is the idea. We can get differences in the return, the interest return that's being earned in these different endeavors just because of the disproportionate price effects of inflation. And then as Rossbar, Rothba pointed out, if entrepreneurs are unable to anticipate changes in the PPM, this too will show up in the market rate of interest. Again, we're not gonna go into detail about these different components. So again, the main point is just to see that time preference theory of interest does not explain these other three components of the market rate. It's not, it's not, right? Those are caused by other factors. The claim is that it explains only the pure rate of interest. Okay, now let's get to the part about enemies of the pure time preference theory. And to do this, let's just use Bumbavork's very helpful description of what he calls the interest problem. So he very famously posed the problem in the, right at the very beginning of capital and interest. That the interest problem is this. Capital, possession of capital seems to grant to its owner an indefinite stream of income or to put it more in line with a pure time preference view of this. If we have a capital good, we know that the current price of this capital good will be bid up to the sum of the discounted marginal revenue products that are forthcoming or anticipated to be forthcoming to the entrepreneur owns this capital good. That means that when you buy the capital good, as the marginal revenue product is earned every year, you will get the interest premium, right? You will earn the sum of the marginal revenue products over time, but you only paid the sum of the discounted marginal revenue products. What explains this value difference? That's the interest problem, right? Where does this value difference come from? Now we've seen the pure time preference explanation, right? So the pure time preference explanation is this difference between the revenue that comes in from owning the capital good and what you pay to buy it, the difference in those two sums of money is due to time preference. It's due to the time discount factor. Okay, well, that's not the only explanation that's been offered. Another explanation was the Marxian kind of explanation, right? Called the exploitation theory of interest. And the exploitation theory of interest says that interest is a surplus value of labor that the capitalist extracts and he does this through the property relations, right? And all that Marxist garbage. So what are the, you know, Boombavrak very famous, he criticized this view and he said, look, first of all, a foundational problem with this view is it's based on the fallacious labor theory of value. And then Boombavrak says, but let's waive that consideration. Let's just set that aside. Yeah, that would be devastating in and of itself, but let's set this aside. And then move on to the claim just on the basis of what actually happens in the market. And as he points out, what actually happens in the market is the second point is that labor is paid the full, it's full value. In other words, if you added up all of the marginal revenue products of all of the different factors of production and now we're, again, we're ignoring profit. We're ignoring the other sources of net income. We're just saying, let's set aside entrepreneurial foresight and the wages of the entrepreneur and so on. If we just think about the discount value, the basic discount value, if you add up all of the marginal revenue products, that does in fact equal the full value of the output produced. The reason for this is because of entrepreneurial competition to buy the factors of production. They will bid the factors of production, they'll bid their prices up to the point where the value of what they pay is exactly equal to the value of the revenue they receive, less the discount. That's what we're trying to explain. Why is it not, why aren't these prices of the factors of production fully bid up to the value of the things that they're producing? And Boombavrak says they are, except for the discount. They are bid all the way up. And he says the way to approve this, that what's being undertaken here is simply that this lower value that's paid to the workers and the other factor owners, that this lower value is just a discount, is, well, you could do this in two ways. You could say, the laborer could earn his full marginal revenue product if he's just willing to wait to be paid. If Derek Jeter doesn't wanna be paid monthly as salary, if he waits for two years to be paid when all the revenue comes in, then he would earn more money. He would earn the full value of his marginal revenue product. Why? Because the entrepreneurs would bid his price up to that full value. And the entrepreneurs would earn only profit and entrepreneurial wages and quasi wages. They would not earn interest. Interest is earned for advancing people money. And then Boombavrak says, well, let's suppose the worker doesn't want to do this. The worker could still earn the full marginal revenue product by doing this. He could just take his pay in advance and then lend it out. Why doesn't he just take his full pay that he gets from the entrepreneur and then lend it out into credit markets? Then in a year or whatever time it would be that he would have been paid his full marginal revenue product, he'll have his full marginal revenue product. Boombavrak says, okay, QED, right? That's just proof that this difference between the two is simply the value of the time discount, if you will. Okay, so that's one enemy. Now another enemy of the pure time preference theory are the productivity theorists. And their basic position is that capital generates a flow of productive services. And interest really is the value of the flow of these services. And we can think about this either in physical terms, just the physical productivity of the capital good or in value terms. So you have some productivity theorists who are what Boombavrak calls naive because they think they can prove this argument about where this perpetual income from owning capital comes from by just looking at physical productivity. And then another camp that are value productivity theorists, they think the interest rate comes from the value of the productivity that capital generates. Okay, so let's start with the physical productivity guys. And there's some very famous names here with some very famous examples in the literature. This particular example of rice comes from Samuelson. Frank Knight had crusoni appliance. Well, actually there was just one, I guess, crusoni appliance. Fisher, Irving Fisher had sheep, a herd of sheep. And all these examples, the point is this, you have a one good economy. You have 100 units of rice. And in a year, it generates another 10 units. So just because of its physical productivity it generates another 10, it's like, so the sheep herd, you have 100 sheep and then, you know, right, they have little lambs and so now you have 110 in the end of the year. And you can keep doing this indefinitely, right? The crusoni appliance just grows 10%, physically grows 10% every year. This is the idea. So you have a one good economy and perhaps you'll notice the key additional assumption here is that since you just have one good you don't have any trade, right? This is the crucial point. So of course, if you structure a model with an economy that where there's no trade, then obviously you can't have inter-temporal trade. Obviously you can't have a time preference manifestation of interest, you can't have any discount, right? So you've sort of assumed away the possibility of a pure time preference explanation here. But let's again just think about what this, think about the counter argument, the pure time preference counter argument to this. Okay, so the first thing of course to notice is that as we said before that the physical productivity of a capital good or the physical productivity of the rice or the whatever it is, the sheep. If we did have an economy where there were prices and ownership of these things or you could trade and there were prices would affect only the marginal revenue product. It would only affect that portion of its rental price. The part of the rental price that is encapsulated in marginal revenue product. So if instead of a hundred units of rice maturing into 110, if it matured into 120, then it would command a higher rental price because its marginal revenue product would be larger. But this would have nothing to do with the interest rate. How people see the intertemporal value of future rice versus present rice is not systematically affected by that. They're not in the, as we said before in the same causal chain of argument. The interest rate traces back to time preference which isn't causally related to the productivity of factors of production. Okay, so that's the first problem. And by the way, the other argument with respect to this physical productivity examples are, you can't really, these aren't really adequate to explain what needs to be explained because they, the implicit assumption is that the rice or the sheep or whatever it is are in fact valuable. The Crusonia plant keeps Cruso alive on his island. The rice can be eaten and the sheep can be sheared and so on and so forth, right? So I don't think that Samuelson or Knight or Fisher would argue something like this. Let's suppose we have a Crusonia weed and it grows 10% per year. And therefore Cruso says, I'm earning a 10% rate of return on the growth of this weed which not only do I not consume but I hate because it crowds out my actual food. No, of course not, right? There's some implicit assumption that the physical productivity here is actually valuable and this is what permits this argument to seem sensible even though again it fails on deeper logical problems. Now let me point out then if we had trade just so you see how this would work in the market. Let's suppose we go down here to this step. If we have trade then the monetary return on investment in rice will always be the interest return. This particular case is that these cases of Crusonia plants and so on are all perpetual. So the rice is never, you never eat the 100 units. It's never destroyed by disease or anything. Just every year it increases 10% add-in for an item. So okay, so what if we had something like that in the real world? What if we had a factor that produced a value, an additional value somehow perpetually indefinitely? Well, then we could calculate its capital value quite simply with this formula. The capital value of a perpetuity is just its marginal revenue product, the revenue return that is generating divided by the rate of interest, right? That's how you do it. So the British government used to issue perpetuities and you could very easily figure out what to pay for them because their capital value is just the face value payment that you get divided by the going rate of interest. Okay, so let's again have money so we can do this. Let's assume that each unit of rice commands a dollar. It's worth a dollar. So we have $100 is the capital value of 100 units of rice and it's generating $10 of revenue, extra rice every year. That's a 10% return, right? So the 10% return, $10 generates the capital value of $100. But this 10% is independent of the productivity. That's the whole point. How is this 10% determined? And the answer is by time preference. What if people's time preferences go down to 5%? What if they now discount that $10 return that is generated every year less heavily? Well, then the capital value of the Crusonia plant or the 100 units of rice will go to $200. So that the return that you earn on this investment in the units of rice is exactly 5%. It will conform to people's time preferences. The rate of return on every investment in the economy will conform to people's time preferences. Again, setting aside the other complications that we mentioned before. Okay, now let me just, since I wanna get to the rest of these, but let me just mention that Fisher also has examples where he tries to do this with other goods. So he has sheep, which are productive. He has hardtack, which produces nothing. Hardtack is like beef jerky. Is that even around today? It's like a prepared, like salted and prepared meat. It doesn't spoil that you can eat anytime. It doesn't, so you don't expand your supply of it. You just have a fixed amount. And then he does an example of figs, and he says, look, in the hardtack case, the rate of return is gonna be zero, and the figs case, it'll be negative. But you can see that that won't be the case at all, right? In fact, if you have these goods traded in markets and you invest in them, they will always earn the time preference rate of interest, or they won't be invested in. They're not generating more value than the resources necessary to produce them. But there will never be a negative rate of interest on any investment. Okay, so now let's go on to the next. These are, Boombabber calls eclectic theories. Eclectic theories are theories that try to argue that the interest rate is mutually determined, mutually determined by time preferences on the supply of present money side and productivity capital on the demand side. So this is a fairly standard kind of approach you would find in neoclassical economics. But as we've argued before, this kind of mutual determination really violates the ends means causal chain. You really have to have an entirely different conception of how you're reasoning about prices in order to uphold an argument like this. You cannot have a causal chain of set in motion when you reason like this, precisely because the value productivity of capital is also determined by preferences. And so you're actually involved in the fallacy of the vicious circle here by assuming, well, in our case, the value productivity to factors of production is determined by the rate of interest. Because in order to know the value, the monetary value of a capital good, I have to know the interest rate by which I discount the future revenues. I have to know that already in order to establish what I'm willing to pay, the value productivity of the capital good right now. And so just like with demand and supply for goods, when you try to think of mutual determination, productivity or cost of production on the supply side and preferences on the demand side, you're caught in this vicious circle. Okay, so this doesn't work too well. Boombaverk's theory is a little bit more complicated, but in a way also suffers from the same kind of problem. Boombaverk, first of all, defines time preference in terms of this premium of present goods. So notice the first problem with Boombaverk is he doesn't give us an adequate explanation of the rate of interest because he starts with a step, he starts with a step that's too far forward in the chain of logic. He doesn't start with valuing. He starts with the objective difference between the price of a present good and the price of that good in the future. He defines time preference as the difference between the value of present and future goods, the price difference, the exchange rate difference. Okay, so that won't work, right? We have to trace explanations all the way back to preferences, all the way back to satisfactions, in other words, that's why the pure time preference theory starts with time preference saying a satisfaction sooner is preferred to the same satisfaction later. Okay, then he says these time preferences will be affected by what he calls subjective factors. These are things like people expect to have more goods in the future, so they prefer present goods now because they think they'll be more fully supplied already in the future. People systematically undervalue future wants and so they prefer present goods more highly because they can satisfy present ones. But again, these are just psychological features of acting. Some people are like this, other people aren't. This doesn't really give us any satisfactory illogical explanation. And then the value productivity is this roundaboutness of production argument where he says present goods have greater value because if you possess them, you can start right now on longer production processes and you can arrive at the greater valued goods more readily than you can if all you have are future goods, right? If you have to wait to get these producer goods. So naturally you desire present goods more readily because your end can be attained more directly, so to speak, by these production processes. But the problem with this again is the problem of the vicious circle. In order to have value productivity generated by these factors of production, you have to already know the rate of interest. It already has to be existing so you can discount the future revenues that you're anticipating earning in the future from engaging in this production process so you know how much to pay today to buy these factors of production. Without the interest rate, you can't do the calculation. Therefore you can't know if it's value productive or not, the investment, whether it's going to generate this value productivity. Okay, so that's a boom bop work. And then the last theory I want to mention is what's called the waiting theory of interest. And this argues in the following way. It says, well, the reason there's a value difference between if you add up the marginal revenue product of all the factors of production and then look at what's paid for them, the reason there's a value difference is we've left out a factor of production. And that factor of production is waiting. So this view, again, common among the neoclassical economists, treats waiting as a factor of production. And says if we include waiting as a factor of production and the interest rate is its price and then we include it, well, then when we sum up all the factor prices, they would add up to the full value of the product. And so we just arbitrarily yanked out waiting from our consideration. And if we put it in, well, then the problem is solved and we don't need time preference per se to explain this. Now there are two problems with this. And the reason I put waiting in parenthesis is because the way in which these guys define waiting is waiting is defined as the supply of present money. Waiting isn't defined as sitting around in a queue, waiting is defined as supplying present money. Well, okay, if waiting is defined as supplying present money, then that supply is determined by time preferences. And they'll admit this. They say, yeah, yeah, it's determined by time. So in my view, waiting is just some sort of superfluous mediating concept then. Why insert waiting? It just adds unnecessarily to the concepts involved in this. Time preference leads to waiting, which leads to the interest rate. Why not just say time preference leads to the interest rate? Supply of present money to the interest rate. This is just semantics, I guess, run amok. And then another problem with this, and maybe in the interest of time, I'll skip over the details. But for those of you who are already familiar with the marginal productivity theory of how we factor price with marginal revenue product, try thinking through exactly how you would do this for waiting defined as supplying present money. What is the marginal physical product then of waiting? And, okay, try to work that out. I'll give you the end result is it ends badly. It does not end well. Okay, now let me just mention two other recent criticisms and we won't go through Dr. Murphy's theory or Dr. Holzman. I just want to mention the criticisms they make of the pure time preference theory. First of all, Murphy says, look in the pure time preference theory literature, there are really two definitions of time preference and he's right about this. One is the boom of Archean definition, the distinction between present goods and future goods. There's a premium on present goods relative to future goods. Then the other is more Federer definition is this satisfaction definition we gave before. And so Murphy says, look, if you define time preference as a present satisfaction is preferred over a future satisfaction, then you can ensure a premium of the present. That's true, but you can't apply that directly to the exchange of goods. And so you can't, there's no manifestation of this in the market necessarily. Now, if you, on the contrary, define time preference as the premium on present goods over future goods, then you can directly apply this to market activity. These are goods traded in the market and so on, but you can't ensure that there's a premium of present goods. But perhaps you already see what the response will be to Murphy's challenge here. The problem is that what Murphy is ignoring here is that the pure time preference theory says that it's present money traded for future money that solves this dilemma. This is the escape, right? Because money allows you to isolate time preference. And so you're not intermixing the timing value of a good with the time preference issue related to the good. And it's the same problem with this second point, right? It's really the same difficulty stated in a different way. Time preference is satisfaction. He says it's neither necessary nor sufficient to create a premium. That's true if you're looking at the trade of goods for goods, intertemporally, that's true. In other words, you can find instances where intertemporally a present good would have a greater value than the same good in the future because the timing of having it in the present is worth more. And that's not time preference, right? That's another reason that's creating that premium. But again, this problem is dispelled by just noticing that the argument is really that it's present money that commands a premium over future money, not goods over goods. And then Professor Holtzmann's criticisms are these two. He claims that the pure time preference theory makes two contradictory claims. A larger stock of a future good is preferred to a smaller stock of that good in the present. That's one claim. And the second claim is that present good, the present good and that good in the future are different goods. This is a claim that Mises makes. Well, you can see the problem. If you hold both those claims at the same time, you can hardly argue that the reason why future goods that have more value are foregone for present goods that have less value is because of time preference. You can't argue that on the one hand and simultaneously hold that present goods that you're trading for the future goods are different goods, see the problem. But again, perhaps you can see that the solution to this is already present in noticing again that it's present money for future money that's being traded. And so this problem is escaped by just noticing that the pure time preference theory does not claim that we have inter-temporal trade of goods. It's inter-temporal trade of money. And then the final point, the time preference, Professor Holtzman again correctly points out that time preference is between two options of choice for the same good as Mises conceives it. But the interest rate is between present goods and future goods. Again, he's intermixed these two different elements. If we think about this with respect to money again we escape this claim, the brunt of this. It is true, we take present money and we trade that physical money for future money, right? We are trading one use of the good for a different use of the good. And interest emerges on this trade and present goods for future goods has nothing to do with it. Okay, I've gone over a little bit, sorry about that so I'll stop here. Thank you.