 This is Jeff Deist, and you're listening to the Human Action Podcast. Today we're talking about the economics and theory behind interest rates. Where do they come from? What's their function? And most importantly, what is the correct theory to help us understand interest rates and why they exist? It turns out the classical and neoclassicals didn't particularly understand this. The Marxists were wrong. The Keynesians were wrong. And it took a French economist named Turgot and later on some of the great Austrians like Bambareverk and Mises to really explain why interest rates exist and what their function is. And here to help us discuss this is, again, the great Dr. Jeff Herbner from Grove City College. Well, Dr. Jeffrey Herbner, thanks so much for joining us again on the Human Action Podcast. Thanks for having me, Jeff. It's a real pleasure. Boy, you know, you talk about interest rates. It seems like this dry subject. I'm not sure most people or even most economists even think that there's a theory to any of this. Interest rates are just some sort of, I guess, public policy tool or just a mechanical item for bankers to apply somehow. I mean, interest rate theory. Do people think about this? No, as you say, not too carefully, I would say. They may have some kind of notions in the back of their head about it, but not very well thought out most of the time. So let's start chronologically. Let's start early. Help us walk through some of the early conceptions or ideas of what interest is. Of course, it's always tied to capital. Capital and interest are sort of two sides of a topic, but since capital theory is such a huge thing unto itself, I want to sort of stick to interest rates today. So, I mean, give us a sense of Adam Smith, for example, for the early classical idea of interest rates. All right. And we can even, well, we could start there and mention also Trigot in this context. Yes. Right. So Trigot is maybe a bit before Adam Smith chronologically. Right. And Trigot, interestingly, was the proto-Austrian on this. Rothbard has a really great section in his history of thought on Trigot, on subjective value and pricing and also interest in capitalization. And so Trigot recognized that interest arises from a fundamental discount of the future relative to the present. So he was aware of what we today would call a time preference, although he didn't think about it quite in the same way that Mises and Federwood. But he recognized that when resources, durable resources are purchased in the market by an entrepreneur, that the payment for the future revenue generated by these resources like land and capital goods and so on would be discounted. And therefore the entrepreneur who has invested capital funding upfront in a production process would earn this rate of interest across time, no matter what product was being produced and no matter how the original present money was being invested. So he was very good, very pioneering in this respect. Well, for our listeners who aren't familiar with Trigot, we have a great article by Rothbard, which we'll link to for the show. And Jeff, he's writing in the mid-1700s. So we're talking about 100 years, for example, before Bamberwerk, who we'll get to. And in reading Murray's article about him, I was struck by this sense, and it still applies to the arguments we're having today about labor and capital. Left libertarians talk about wages as theft. Alexandria Ocasio-Cortez talks about exploitation. But Rothbard says, well, interest represents a payment by labor to capitalists for advancing their wages. In other words, the capitalist has to wait to hopefully make a profit and also risk. Whereas the wage earner is getting paid here and now in advance of, let's say, the sale of the actual good or service. Yeah, exactly. And Trigot actually integrated both those features, both the abstinence, the waiting part, so to speak, and the uncertainty. He actually saw that both of these would be a component of this discount, this price spread between paying money up front to buy inputs and then producing something and selling the output for money in the future. Well, so also writing in the 1700s, Adam Smith, what I think of what I guess the classical conception of interest is, some sort of return on capital. So it's more amorphous and it doesn't go directly to time. Yeah, that's right. And, you know, in Boombaverk's treatment of the views on interest before he wrote, he showed that these British classical economists had a wide variety of particular ways in which they tried to explain interest. But as Boombaverk points out, they were all tied to the labor theory of value. And therefore they were always attempting a Smith and Ricardo and so on, always attempting to make a room for interest within a labor theory of value where the assumption is that the final revenue of the product produced is reducible down to payments for labor. And this becomes, as you can imagine, this doesn't seem to leave any room for interest at all. And so it always had to be something like what Boombaverk called use theories of resources. That there was somehow a separable use value that was tied to labor that was used then to engage in production by combining capital and labor together. Right. And as pointed out in Roger Garrison's article about Boombaverk who we'll get into a little bit here, we'll also link to that he in his first volume of his three volume treatise. And these three volumes together represent what Joe Salerta, anyway, considers one of the big four books in Austrian economics. So the first volume is called History and Critique of Interest Theories, which as Jeff Herbner just mentioned, discusses some of the ideas in the past. The second one is maybe the most famous and the most applicable to our conversation today, the theory of capital. And the third is called Further Essays on Capital and Interest. And all of these are written basically in the 1880s. But in that first one where he's criticizing some of these, he really helps us, I guess, better understand all the thoughts that had come until then. But one thing I'd like to point out, Jeff, is he never read. He died just after Mises' theory of money and credit came out. And in correspondence appears to have not read that and thus was never influenced by it. Right. So Mises himself writes that when his book, Theory of Money and Credit, came out in 1912, that Boombaverk spent some time in his private seminar discussing the work. But as Mises chronicles that discussion, Boombaverk was really not accepting of Mises' approach to money and what he was trying to get at. He seemed somewhat uncomprehending of the whole structure of the book and what Mises was trying to do. Yeah, and of course Mises criticizes, or not criticizes, distinguishes himself from Boombaverk a little later, actually decades later in human action. But let's get a little further into what the gist of Boombaverk's second volume, his Capital and Interest, the second volume is all about. I mean, first and foremost, he brings us back again to this idea, again and again to this idea of time, that there's a difference in value between present and future goods. And the two of us talking, that sounds so easy and obvious, but in the 1880s maybe that wasn't so obvious to everyone. Maybe you and I benefit from hindsight here. Well, absolutely we do. And it's to our great benefit, of course, to be able to read and absorb Boombaverk's work. He, of course, was a very complicated writer in pioneering his own theory of interest, because as Rothbard and others have pointed out, even though he stressed time preference, he has a more objective component of what determines time preference than we would think of, or that was filtered out really by Mises and Frank Federer. He seems to think that, and argues that time preference itself is, there's a law that influences the rate of time preference itself that's determined in turn by the technical considerations of production. And so Boombaverk himself sort of reintroduced into his own theory after showing that other theories based on productivity were no good, an element of productivity. And so it seems like the temporal element has at least been alluded to in early work. Obviously, Turgot understood it, but did the Classicals understand interest as this idea of discounting things in the future? I mean, was the temporal element there for work before Boombaverk other than Turgot? It was. So Boombaverk points out that Sr. had what Boombaverk called an abstinence theory of interest, which then involved a weighting or a time element. And the criticism that Boombaverk made of this, although he pointed out that that is somewhat better than the other classical, British classical economists, was that this would explain only the supply of loanable funds and wouldn't explain the demand. Why would people pay just because the supplier of loanable funds insists on a payment in order to abstain from present consumption? Right. They're only giving something up because somebody else wants what they're giving up. Yeah, exactly. I want to get further into Boombaverk here, but should we? Is this a good time to mention Vicksal, Newt Vicksal? They call him, I guess, the Swedish Austrian, which is kind of funny, but he was a Swede and he's working at somewhat the same time as Boombaverk. And he used the phrase, for example, the natural rate of interest. So what should we know about Vicksal on interest? Yeah, it's not so much Vicksal's theory of interest. What was important in his work for the Austrian school was his view that there is a kind of natural rate of interest that emerges on the market that is determined in the particular way that he thinks that can vary from the bank loan rate. And what was important about Vicksal was that he showed that if the bank loan rate is artificially lowered below the natural rate, this will lead to the beginning of a Boombust cycle. And so it wasn't so much Vicksal's theory of interest that was important to the Austrians and Mises who came later, but this theory of the dynamic of what would happen when bank rates were lowered below this natural rate. Well, let me ask you something. I'm not saying this facetiously. Do you think Jerome Powell knows who Vicksal was? Do you think a 20-something newly minted PhD, brilliant Ivy League PhD that Fed knows who Vicksal was? Maybe, maybe not, probably not. But yeah, it wouldn't be someone who would be studied vigorously by newly minted PhDs. Right. You know, I'm joking, but it's not a rhetorical question. I mean, I would like to know the answer to that. You know, it's funny to me to think about the idea that people were thinking and saying brilliant things 150 years ago, and maybe we ought to read them or give them some credence. Yeah, it's just like Rothbard always pointed out about how knowledge can be lost. It's not a vague theory of history that we just progress further and further into the light, but sometimes we lose knowledge. Right, right. We imagine that society goes forward only and never sideways or even backwards, and I think that applies to knowledge also. Let me ask you this. What is Vicksal, what's the point he talks about having a stable price level and that the natural rate of interest will give us that? Is that, I mean, a stable price level sounds like a good thing, but is it a good thing that we ought to seek? Well, in his system, it's the natural result. I'm not sure if it's good or bad per se. What Vicksal was trying to do was simply to explain the causes behind price inflation and the causes behind price deflation. And within his system, he thought about this with respect to the quantity theory of money, but within his system, this was the mechanism by which price inflation would be set in motion. Without this distortion of the bank rate below the natural rate, if the natural rate were just persisting in the market and left alone, then we would have stable array of prices. But if the bank rate were lowered, then you would have arbitrage. Entrepreneurs begin to borrow at the bank rate, low rate of interest in arbitrage, those funds into production. And in order to do that, they would have to buy more resources and they begin to bid up the prices of resources and we'd see this period of price inflation and the expansion of production and so on. That kind of sounds familiar, doesn't it? Yes, indeed. I mean, that sounds like proto-ball investment. Yeah, well, again, I'm not sure Vicksal himself saw it that way, but you're right. In the hands of, well, Mises, who accepted Boombaberg's capital structure theory, you could see right away how the application of this dynamic would distort intertemporal allocation of resources. So getting back to Barbara, people who haven't read this, it really, first of all, I'm intrigued by how people in the 1800s were writing. It tends to be zestier. He has a lot of exclamation points. He has a lot of cool words like pike staff and things like that. And it's just, obviously, this is a translation from his original German, the one I'm reading happens to be by Hans Sennholz. But nonetheless, he gives us some causes of interest or some reasons why interest would arise and why it exists. And they're so interesting to me because they're not dry or technical. They're actually sort of full of life and zesty. In other words, one of the causes, for example, I'll give you Jeff, is he talks about the brevity and uncertainty of human life. And we don't think about that when it comes to banking, but that's part of what we're talking about here is that we could die. But tomorrow is not certain. And so interest has almost a philosophical or metaphysical element. Yeah, that's exactly right. And when Boombaberg mentions that, he's more in line with what Mises would take as the notion of time preference, that it's simply bound up in the human condition of us being finite and temporal beings. It must be the case because we're temporal, that we distinguish between sooner and later, and that we always prefer sooner satisfaction of an end to later. Now, Boombaberg wouldn't formulate it this way, but that's the statement where he's getting closest to what Mises would formulate later. I should add on your point about the liveliness of Boombaberg, he also is very interesting in the way that he argues by analogy. You may have picked up on this too. He'll state an argument kind of dryly from some author long ago, and then he'll say, you know, this is analogous to this particular case, and then he'll give us a really interesting modern case, modern for him. Yeah, and just the level of writing. I think in part it's because economics was not thought of as such a standalone discipline at the time. So as a result, I think the writers in the 1800s brought in a lot more history and philosophy and other sciences. You know, when you talk about the temporal element, and I think all of our listeners would agree that humans are temporal beings and that this is sort of an a priori truth about humans that we always prefer present consumption of future. I think the example we might give of that is, at least with our current life expectancy, everyone would rather have their dream house at 40 than 90, right? Yes, that's right. But I was just thinking about this over the weekend. I wonder if people would challenge that today and say, well, just like people are saying that the AI revolution is going to render Hayek and Mises' arguments about information obsolete. I don't necessarily agree with that. But, you know, well, you know, we can't know that you'll always prefer present consumption of future. What if life extension makes us live 200 years? What if x? What if y? I mean, what do you think of that, the idea of time preference and that we always prefer something sooner than later? All other things being equal. Right. Right. Again, I'm a complete necessity on this. I think that it's the same or analogous to the existence of our being finite, which implies then the scarcity of the means that we can apply to the attainment of ends. Once we recognize that means are scarce with respect to the attainment of our ends, it follows just as a matter of logical deduction that we would always prefer more of a good to less of it. As long as this good remains scarce because we're finite. And Mises argues the same way then about our temporal existence. Since we exist in time, we recognize right away the difference between sooner and later. Once we recognize the difference between sooner or later, because of the passage of time, we always prefer, now he specifies, a given satisfaction sooner as opposed to the same satisfaction later. So it's a Seder's parable claim that he makes. He's very careful in the way that he awards this to ward off objections of the sort that you're talking about. Well, I guess when we solve scarcity and mortality via technology, we can drop all this Austrian economics business. Yeah, we'll just live forever at the bliss point, right? Yeah. But, you know, another point that Bombavik makes that I really enjoy is that he says, I'm quoting him, nothing in the nature of interest could make it unfair or unjust in itself. So he's, you know, there are worldviews. There are left-wing worldviews. There are, you know, in the Islamic world, there are different ideas about whether interest is ethical or moral. And he's making the case that because it arises naturally, there's nothing about interest per se, contrary to the Marxist, that's exploitative. Yeah, that's right. And again, he notices this, and Rothbard emphasizes this, but Bombavik even notices this about Thergo. Thergo was a great opponent of anti-usury laws of the Middle Ages. And he made precisely this point, a very realistic analysis where he said, look, it's just in the nature of human existence that people are going to lend and borrow at a positive rate of interest. And if you outlaw this, it won't eliminate it, it'll just drive it into other channels that are less efficient. Yeah, and I think there's some parallels here to philosophy, to sociology, even to ethics, where we say that generally speaking, things that comport with human nature are good and things that are at odds with human nature are bad. I mean, we're getting into... That's why I love reading old Austrian stuff is because it's not dry. It actually makes you think about life in the broader sense. Yeah, that's absolutely right. Guido Holtzman has this great introduction to Mises' epistemological problems where he makes this point about the early Austrians really thinking of themselves more broadly than just as economists in the narrow sense, but as sociologists, if you will, or commentators on a broader social nexus. Yeah, and so in developing what we now would call a time preference theory of interest, Bob Beverick wasn't using that term per se. Fast forward to, for instance, Frank Knight, when we talked about Manger's principles, Frank Knight had written many years later in about 1950, had written an introduction to that book where he criticizes this outright time preference theory of interest. And I'm quoting Frank Knight from that introduction. He says, well, it seems untenable in the absence of any reason to believe in the underlying psychological assumptions. And so this is getting into something that Bob Beverick had not yet gotten into because Mises had developed praxeology and the things that precede praxeology, which we call timeology. So talk about the underlying psychological assumptions which here, Frank, now he is dismissing that undergird all of this. Right. So the way I would think about this is that Knight seems to, with respect to interest, he seems to think that this is just a phenomena of production itself. In other words, when he thinks of interest, what he's trying to conceptualize is simply the greater physical productivity of capital intensive production processes. And so he bypasses the very fundamental notion, really, even of human action in the sense of the way that Mises thinks about it as the relationship between the human mind that's evaluating and choosing and so on and these objective features of the world. So he wants to criticize this more robust analysis that Mises introduces by just looking at one element of human action, which is this objective, technical, physical set of production possibilities. And presumably, Frank Knight had read Bob Beverick, would you imagine? Oh, absolutely. But again, the first volume of Bob Beverick's three-volume treatise is all about debunking use theories, productivity theories, absence theories, etc. So it sounds like you are applying to Frank Knight sort of a productivity theory of interest. Yeah, that seems well. This is what he wrote in response to the Austrian time preference view. He wrote about crusading of plants and so on that generate just by natural growth an increase in their size or fruit or whatever over time. And that this proves definitively that if you own the plant, you earn this stream of physical return. And that's all we need to explain. Whereas Bob Beverick pointed out, that's not what we're trying to explain with interest. What we're trying to explain with interest is the intertemporal price of money. We're trying to explain the phenomenon of the market, which is brought about by human choice and action and not by just mere technical features. Before we move, let's say, farther ahead into Mises on interest, let's get out of the 1800s into the early 1900s. You know, Keynes had this idea of liquidity preference theory that, you know, we like things that can be more quickly or readily converted into currency. And to the extent they can be, they'll command a lower rate of interest, whereas things that are less liquid and thus bear some more uncertainties or a longer period of time will command a higher rate of interest. First of all, I assume that from your perspective, this is wrong. And second of all, nonetheless, we keep coming back to this element of time, which other schools seem to, if not grudgingly accept, at least weave into their own ideas. Yeah, so Keynes took the other sort of extreme position as opposed to productivity theories. His view is often characterized as a purely monetary theory of interest. So he thinks the interest rate is determined by the demand for money, as you say, the liquidity preference, given the stock of money that exists in society. And one might think, well, how is that possible? Why would simply holding money generate interest? And so here what he says is that it's an opportunity cost. So the person who holds money forgoes earning interest on bonds. And therefore the interest then influences the holding of money. There'd be a downward sloping demand for holding money relative to interest. And of course, as Boombarberk already pointed out, this way of reasoning, he pointed this out in criticizing other interest theories before Keynes, obviously. This method of reasoning from explaining the price of something is an opportunity cost. It doesn't work. This is logically inadequate. You can't explain the price of the product of something by its opportunity cost alone. As we've already mentioned, you have to explain it by the demand for the thing and not just the opportunity given up by the person supplying it. The other aspect of Keynes' theory, of course, is what he calls the marginal efficiency of investment. So Keynes thought that each investable project in the economy, the investor, could calculate the rate of return on this investment and then invest in the higher rate of return projects out to the loan rate at which you could borrow money. But this, too, is completely overturned. This view is completely overturned by Federer and really implicitly by Turgot, who pointed out that the rate of return on an investment depends upon the price you pay for the resources that you buy in order to engage in the project. And the price that you're willing to pay for the resources that an entrepreneur or investor is willing to pay for the resources is the capitalized value of the future revenue stream, and the capitalized value is determined by the rate of interest itself. So once again, this is just logically untenable to reason the way that Keynes did. But what we think of as a Keynesian today, and of course, a lot of views, a lot of neo-Keynesianism, whatever you want to call it, a lot of views ascribed to Keynes were not necessarily actually held by him. I'm someone who has read nothing by Keynes other than the general theory. So it seems to me if your sole MO is to stimulate demand in an economy and that you believe consumption equals prosperity, which seems to be what we believe today, then high interest rates are bad. We want people buying and consuming, not saving. Yes, that is the whole thrust behind the Keynesian framework. And by implication, the framework of most modern macro economists who accept the aggregate demand, aggregate supply kind of framework. Now, we haven't really touched on Marx here. I'm going to paraphrase Marx and his progeny, I assume, would say something along the lines of interest is inherently exploitative because all value comes from workers. And so anything that they're not paid that doesn't go to them but goes to some sort of owner in the form of interest is taken from them. Is that roughly correct? Yeah, that's exactly it. And then, of course, it was the Boombab work who exploded this view in his great work on this, pointing out the actual two components that Turgot noticed in the price spread between prices of output and prices of inputs paid by an entrepreneur. When an entrepreneur buys inputs and pays wages to labor, there's a discount in the payment from the marginal revenue product that the worker would earn. If the worker were willing to wait until the output was sold, then the worker could earn the full marginal revenue product. But the price spread exists because the entrepreneur pays in advance of the sale of the output and the generation of the revenue. And then the other is, of course, uncertainty. That someone has to bear the uncertainty of the final product not being sold for what is anticipated and built into the payment to labor and wages. And this is undertaken by the entrepreneur and the workers relieved of this bearing of uncertainty because the worker again is paid in advance a contractual wage. Well, and Boombabba goes into this. So give us your thoughts. What would be the role of interest if any in a pure socialist or pure planned economy? Well, as Mises points out in Human Action, what he calls original interest, time preference and original interest exists regardless of the institutional setting. It exists in the Caruso economy, it exists in the socialist economy, it exists in the market economy and so on. It's just that only in the market economy, well, the Caruso economy is a separable case, but in the division of labor economy, it's only in the market economy that it can be efficiently integrated into decision making. So the socialist centrally planned attempt at arranging the division of labor would again face the same kind of economic calculation problem. They wouldn't have a market interest rate in denominated in money by which they could integrate their present value calculations of, you know, investable projects to determine where the greatest capital value investable projects are. Yeah, it's interesting how even the most planned economies always come back to these sign posts and these signals and that grasping in the dark doesn't actually work so well. So I want to talk about this section in Human Action and I think for today's discussion anyway, I like his discussion of interest in Human Action perhaps more than in the theory of money credit because it represents a view later in his life and maybe a more developed view. So this term you've already used at originary interest and, you know, I've fallen in this chapter too of saying, well, interest rates are prices that, you know, supply and demand of money. And he reminds us that the price is just the ultimate reflection of interest rates. In other words, originary interest, he defines as a ratio and not a price and that ratio is more or less between the value of our want satisfactions now and the value of our want satisfactions later. So help us understand this term of originary interest. Yeah, this again is a little bit tricky and you have to read Mises very carefully. It's a very technical area in economics. So Mises defines, at least the way I read him, he defines time preference as a satisfaction difference. So time preference again is the desire that people have, the preference people have for a sooner satisfaction as opposed to the same satisfaction later. Now you can't put satisfactions in a ratio. You can only rank order them. And so this doesn't give us an interest rate or a ratio. To have a ratio, we have to, the time preference has to be manifest in some act using goods. And what's fundamental about this act is what Mises calls originary interest. This is the ratio of present goods to future goods, well, the premium that present goods command over future goods as he puts it of like, kind and quantity. Now the other complicating factor of course is that the only actual manifestation of originary interest is in money and not in actual goods that are being bought with money and then sold for money. So an entrepreneur borrows money or self-finances production to buy a collection of inputs and then transforms these inputs into other goods, output, and then sells the output for money. And the interest on the market that the entrepreneur earns is in the form of money even though the entrepreneurs fundamentally taking this collection of goods and transforming it by then producing something of greater value in the future in terms of the output. But this ratio, let's say, of want satisfaction now, want satisfaction later, I mean ultimately, apart from governments and central banks, and that's a big apart, ultimately it manifests itself in a number, doesn't it? I mean at some point this supply and demand determines a price and you and I, you loan me a thousand bucks and we come up with an interest rate. That's correct. And this is precisely why you can't conceive of this ratio or this price, however you want to say it, you can't conceive of this in goods themselves because again you couldn't form a ratio between, or not a single ratio at least, between all the different collections of producer goods that are used, hours of labor and numbers of machines and acres of land and so on and so forth against the output that's produced, let's say, number of refrigerators that are produced in the production process. You can only form this ratio in a common unit and the common unit is money. So once again we see the importance of economic calculation to Mises, that all of the different elements of pricing are not in kind and barter exchange ratios but they're all including the interest rate in money. Now let's go back to our example of no central bank and no state intervention. What if, you know, it's 150 years ago and you're in a small town without access, neither you know your small town bank has access to big national or international capital markets. Would my ability to borrow money literally be dependent on my neighbor's willingness to save and deposit and would the interest rate reflect that? I mean, it seems like all of this at one point in time was hyper-localized. It's possible. I'm not sure about historical analysis of cases like this, but certainly across regions you can see this kind of thing. The thing that tends to though overcome this regionalization of credit markets is precisely that this trade is all done in money and very quickly in history then it could be done in claims to money and once that step is taken say in the high middle ages by the banking institutions of northern Italian city-states, you tend to see a more widespread geographic area sort of encompassed into a single financial market area. Right, so in other words the market trends this way, it takes care of it. Exactly, it expands and develops through financial innovation this way. So, Mises talks about a neutral interest rate. Now, we've heard him say many times, money's never a neutral. Money never hits everybody at the same time and benefits everyone at the same time. But what's a neutral rate of interest in the Misesian sense and what does it mean to us? How does it help us understand things? I think here Mises is trying to integrate now Excel's notion of the natural rate. The problem with the way Excel formulates this is that he did it in terms of the goods themselves. And so once again it isn't possible for Mises to integrate a barter exchange ratio analysis into his monetary economic calculation analysis. And of course there are additional theoretical implications that Excel didn't develop that Mises does in his business cycle theory. So to talk about a neutral rate of interest, he's speaking about the rate that would emerge on the market through just the voluntary saving and investing of people based upon their time preferences and other factors involved in lending and borrowing. And then then again he invokes the kind of dynamic that Excel talked about. What if the government steps in and manipulates the market rate and it deviates, it goes below this natural rate of interest, then what happens? And so he sets in motion again in Excel this process was done by an actual difference between the bank rate and this barter exchange natural rate. But as Mises points out, since money is integrated into the economy, when the bank rate goes down, the rate of exchange or interest I should say in production also goes down. Well, I noticed that Mises takes a lot of pains to talk about what interest is not. He insists, first of all, it's not rent. If you recall, he has a pretty lengthy few pages about how it's not rent and it's not return on capital. And in the context of this lengthy few pages, what I really liked was he sort of debunks this whole triumvirate of labor capital land. We tend to look at things as one of these three categories and Mises takes pains to say this is very unhelpful. That's exactly right, he gets this again from Federer, or at least Federer was the one who pioneered this view. And again, what Federer was working against was this position that had come out of the classical school and even was sort of lingering in to go that there's something especially productive about capital or for to go about land or one of the factors of production that there's some distinction with respect to the rate of return that can be earned by investing in these different types of factors of production. And what Federer pointed out is that this is entirely wrong, that the process of capitalization, the process that the investor goes through in calculating the present value of the future revenue stream by investing in a durable producer good is the same whether the durable producer good is land or capital good or any other factor of production. So there's a commonality, there's a universal law of pricing with respect to all of these factors of production and that's what Mises is emphasizing. Yeah, it's a great section of the book. Well, again, in this discussion of a recent interest, he points out land, if we didn't discount all of its future uses, we might find people didn't really buy and sell land. Yeah, that's correct. They would just hold it. Yeah, because the price would be indefinitely high. You would have land that's been in useful production for thousands of years. And if you tried to just add up the monetary return, you know, a thousand years into the future from land that can grow a crop every year, you get indefinitely high prices for land and then land could never be bought and sold. Well, in the Misesian conception of a rigidary interest, and I hope I'm saying this right, Mises argues that the number, the interest rate is always positive. And of course, today that's very much in dispute, let's say across Europe, not necessarily nominally, but there are sovereign debt from certain European countries that trades and sells with a real negative return on it. And there's people, we'll get to this, but there's people like Eamon Butler. I'm sure a lot of you will know that name, an economist with the Adam Smith Institute who would argue that interest can be zero or even negative. So first and foremost, and those of us who are lay readers like myself and like most of our listeners, the idea of zero or negative interest rate is just crazy on its face. You'd never give up something today in exchange for something less tomorrow. So help us with the Misesian argument that the interest rates are always positive. Right, just to comment though on what you just said about the common sense view of this. This was also the position that was advanced by Irving Fisher. He was, as far as I know, the first one to point this out, that the nominal interest rate, the actual exchange of present money for future money, the inter-temporal exchange rate, could never be negative because as you point out, the lender, if it were negative, the lender would simply hold on to the cash and would not lend and then would have the full sum at the end of the period. And that's always better than having the smaller sum where you would have to have a negative interest rate on the principal. So that's in the literature a very powerful argument. But Mises's view again goes back to the human condition where he points out that time preference itself can never be, so to speak, negative. There always must be a preference for sooner satisfaction of an end compared to the same satisfaction later that this is just built into human nature. And if originary interest then is just the manifestation of time preferences, Mises argues, well then the originary interest can never be negative. Right, and let's talk a little bit more about this. And in the future, ladies and gentlemen, I'm going to do a show more on the actual mechanics of central bank money creation and central bank interest rate targeting. Maybe we won't use the term setting. So this discussion is more about interest rate theory. So I want to again make that point. But let's say interest rates were zero, not even negative, but zero on just something like my Vanguard money market. I would be sorely tempted to say even with any counterparty other than cash in my house and then I've got a burglary risk. But with any counterparty, even a CD or a money market or a local savings loan bank, I've always got a risk of them going under or closing their doors or having a seizure or something. So why would I ever even deposit money much less lend it at zero interest rates? Now, let's say I had 50 grand in my Vanguard. I might, at zero interest rates, I might take the risk of storing that in my house. Now, if I had a million dollars in my Vanguard, I might say I'm not comfortable with a million dollars in my house and so I'll pay a couple points for some sort of safeguarding, basically warehousing electronic blips at Vanguard or for whatever in a bank. But apart from that burglary risk or whatever, why would I ever, why would I just hold on to my cash in the most literal physical sense? Yeah, no, that's exactly right. Or you would take the cash and buy consumer goods and enjoy the subjective value of the consumer goods. Yeah, that's exactly. I might just say, well, I got a car or put it into something tangible. I might buy gold and silver. I might buy all kinds of things or I might just go to Vegas. But I'm not earning any interest on my money. Now, let's take that into the negative interest rate territory which we've actually seen in Europe. I mean, is there an argument that a big institutional investor, let's say a pension fund, a university, hundreds of millions or billions of dollars or euro or Swiss francs or whatever says, well, look, these sovereign debt, whether that be U.S. Treasuries or German bonds or not Greek and Italian bonds, by the way, but German bonds, those are the next thing, the next best thing to actual cash. I mean, the default risk on those approaches zero because these are sovereign governments that can produce, well, the ECB can produce euro. And so we'll pay a few points in the form of 3% negative real interest just to know that that's the extent of our loss. It's almost like in a pure 100% reserve bank, I might pay a few points for in effect a warehousing function. Yeah, I think that's right. I think that's correct. And just on the other aspect of this, when governments, central banks institute negative interest rates with respect to the banking system, then this, of course, is not an interest rate at all, but just a fee. Yeah, right. It's a fee. And of course, the other thing is we kid ourselves, I think, most of our listeners would agree about the real rate of inflation. So, you know, who knows what's a real negative yield? If you're getting a point and a half on your savings account or whatever. Yes, that's right. I mean, that might be real negative at the moment right here in the good old U.S. of A. Absolutely. So this is interesting to me. But there's another argument out there, and Eamon Butler makes this argument. So we'll play devil's advocate. It says, well, look, the days of high interest rates are gone forever because we no longer need to pay that much to get capitalists to do things because we've gotten really good at capitalism. We've gotten really good at producing stuff cheaper and cheaper and cheaper as productivity increased throughout the 20th century, now 21st. So as a result of that, we're better at producing stuff. And on top of all that, not only are we and the West better, but now we have places like India and China and Vietnam that can make stuff too. So you put all this together and we've got an overall deflationary environment for stuff and therefore investors are willing to accept lower rates because falling prices boost their real returns. And so even a nominal rate of zero is a real positive interest rate when we view things this way, when we talk about deflation, the deflationary pressures of a productive global economy, especially look at something, Jeff, like consumer electronics. So I think the point here, of course, is to go back to this capitalization idea. If entrepreneurs anticipate lower selling prices in the future, they're in a market like consumer electronics where they see the price trend going down, then of course that affects their demand for the factors of production now and the price of the assets that they're holding to engage in this production because the future revenue stream now is altered. And whether or not they, or to the extent that they discount this future revenue stream, is based upon a different, entirely different consideration, as Misa says. And this consideration is just the, so to speak, social rate of time preference. The underlying rate of time preference that's moving people to save and invest. So, but doesn't that imply that interest rates would adjust positive? In other words, wouldn't they factor in, for instance, or capitalists, entrepreneurs would factor this into their wages going forward? The wages they pay. Wages and prices for capital goods, mainly prices for capital goods. This whole deflationary push in consumer electronics is driven by falling prices for the intermediate capital goods and not so much wages. But you're right, the price structure, the production price structure is going down. So I wonder if it's really deflation and productivity and technology has a lot to do with that. Technology is what makes a cell phone so much better than a desktop computer 25 years ago. I wonder if the idea that we all feel kind of materially well off in the West is really just a result of technology and productivity and deflation outpacing the rapaciousness of governments and central banks. So it's not because people want to say, look, you libertarians, if you guys were right about all these regulations and all these taxes and all this central bank intervention, we'd be getting poorer. But we're not. Look at this. I just got this incredible cell phone for $400. Yeah. Well, we need to recognize here, in addition to what you have already said, that they're different. They're freer and less free sectors in the economy. And of course, the government doesn't heavily regulate or subsidize the consumer electronics. And so this is a freer part of the economy. And naturally, this attracts even more investment than would be otherwise. And if you look at areas of the economy that are heavily regulated, health care and so on, you see prices going up and up and up and the quality going down and down and down. Yeah. Isn't that amazing? We look at health care and education. Right. The two areas of the government. And of course, it wasn't that long ago, even 10 or 15 years ago, we considered Silicon Valley was the Wild West. And it was considered soft. The one thing the United States is good at is software. And we've in many ways led the world. And we always had this sort of cowboy view of venture capital operating in Silicon Valley and that there were these fortunes to be made. And even big companies like Microsoft used to almost sort of pride themselves on not having a lobbying presence in Washington, D.C. that they were operating outside of that. And of course, now, yeah, Facebook and Google and Microsoft have some malabias, let's just say. Yeah. Unfortunately, times are changing. Yeah. But really, you know, interest rates would, in other words, I guess the point I'm trying to get at here is that deflation alone doesn't create an argument for zero or negative interest rates. No, that's correct. It does not precisely because entrepreneurs are always and investors are always forward-looking. And so if they see the trend of output prices falling, they lower their demands right now for the factors of production, especially capital. And therefore the whole price structure goes down without any difference in the price spread between output prices and input prices. Well, I'll leave you, Jeff, with this question. Let's say some of our listeners, I hope some of our listeners will go check out Bombarevark. We will link not only to the Togo article I mentioned by Murray Rothbard, but we'll also link to a great sort of summary biography of Bombarevark written by Roger Garrison. And you'll really enjoy it and you'll learn a lot from it. But, you know, if one of our listeners wanted to maybe grasp interest rates better than they grasp them now, what would be a recommended book or article that you might think of to help them with that that wouldn't require a treatise-length reading assignment? Right. The great work is Rothbard's edited volume of Frank Federer's articles, Capital Interest and Rent. Okay. And we've got that available at Mesa.org. But, you know, the other thing that we haven't touched on, Jeff, is that there's an ethical component to all of this. Obviously, Guido Halsman has his great book, The Ethics of Money Production. The interest plays a role in all this. In other words, it's not just that interest rates, as we mentioned at the beginning of the show, are some technical policy tool that regulators or technocrats or central bikers use to adjust up and down. And the economy is kind of like the, you know, the space heater in your office or something. It's too hot or too cool. But instead, I mean, there's a component to all of this that goes back to time, not only to our interest in things now rather than later, but also in saving for a rainy day, for recognizing we're hopefully going to get old someday and maybe even more hopefully that we might have children or grandchildren who live on. And when you interfere with this process, when you interfere with interest rates, there's an ethical and cultural component to that, not just financial or economic. That's absolutely true. It breaks the natural intergenerational associations and families. It stifles the creativity of people who are, you know, more inclined to that sort of activity because of the dearth of investing funds and so on. Yeah, Gido's work is great in this respect. Well, again, it's Gido Halsman, the Ethics of Money Production, a magnificent slim volume. And if you're not following me on Twitter at Jeff Deist, follow me, send me a message, and I might just send you a copy of that book for free because you'll really enjoy it. It's not your typical economics text. That said, Dr. Jeffrey Herbner at Grove City, thanks so much. This was really a great conversation. Help me, and I'm sure it'll help our listeners. Thank you, Jeff. All right, take care.