 This book is a Mises Institute project. It arose out of the cooperative effort of the staff of the Institute who thought it was a timely to bring together in one source some of the classic works Defending the Pure Time Preference Theory of Interest. So the book contains articles by Murray Rothbard. It has an excerpt from Human Action by Ludwig von Mises. It has two articles by Roger Garrison and one by Israel Kursner. We thought also that this was timely because interest rate theory is becoming more widely debated and there has been a renewed interest in particular in the Pure Time Preference Theory. It's suffered some criticism as of late that I'll mention in a minute. So let me just outline the thrust of the Pure Time Preference Theory in the context within which the what I'll call the older debate took place in which Kursner and Garrison and Rothbard and Mises are all writing in defense of this view. So I would put the case this way. The Pure Time Preference Theory simply applies the Misesian theory of pricing to the determination of the intertemporal price of money and to think in most succinct way about Mises's theory of pricing. What Mises argues is that we as human beings have preferences, so all action stems from our judgments of value that we make in our minds. And from these preferences, we then are motivated to act and some people wish to, because of their preferences, acquire a good through purchase and others to sell the good. They have reverse preferences and the price emerges that clears the market, so it depends upon the intensity of demand relative to supply. And in this formulation, Mises insists, and this is really the crux to the Pure Time Preference Theory of Interest, Mises insists that preferences are the cause that sets in motion the determination of price. In response to this claim that, well, what about objective circumstances aren't preferences conditioned by objective circumstances? Mises said as far back as the theory of money and credit in 1912 that, no, no, this is not the correct way of viewing human action. It's actually our mental judgments that determine the influence of objective circumstances upon our actions. So, and these preferences are not, we can't go back to some other prior cause before them in human understanding. They are the first cause in the sequence of cause and effect. So the Pure Time Preference Theory simply takes this insight and applies it to the question of the intertemporal price of money. So the argument, again, just in sketch says we have time preferences. We have a preference for sooner satisfaction of an end as opposed to a later satisfaction of the same end. And because of this, we act upon these preferences. Some people with higher time preferences being willing to borrow present money in exchange for future money. Some people with lower time preferences being willing to lend at a particular interest rate to these high time preference people. And then just like in regular markets, the market clears depending on the intensity of time preference, the higher time preference people cooperating with the lower time preference people. With respect to the objective circumstances, then, that everyone agrees have something to do with the setting of the interest, right? Just like everyone agrees that objective circumstances have something to do with the price of apples or the price of gasoline. The Pure Time Preference Theory says that the particular influence of these objective circumstances is determined by the judgments of our minds, just as it is in the general case of pricing theory. As Roger Garrison likes to put it, the interest rate is determined by time preference alone. Emphasizing this point. Okay, now let me set this in the debate, the context of the debate, and I'll use the phrases here, the older debate and the newer debate. The older debate that was taking place within the context of these articles that were written and then a newer debate that is addressed in the introduction to the volume. So in the older debate, in thinking about the schematic I've given you, there was one view that said objective circumstances alone determine the interest rate. This is the productivity theory of interest. It was held by a number of writers that Boombavvork attacked on this point. This, by the way, the analog of this in regular price theory and general price theory would be a cost of production theory. So these are similar in approach. A second alternative is the view that time preference and objective circumstances, say the productivity of capital, mutually determine the interest rate. They have mutual independent causal effects on the interest rate. This, again, is like the mutual determination theory of Alfred Marshall. All right, so again, Boombavvork effectively criticized this view. The third view is that objective circumstances, like the productivity of capital or other of these objective things, affects the interest rate independently, but through time preference. This is a somewhat more subtle view. This is the view that Boombavvork and Fisher had of the interest rate. But again, if you think about this in terms of the general theory of pricing, Mises's general theory, we see right away that we would not accept this. We would not accept that there's some necessary determined independent effect of some objective factor when it changes as it filters through my mind and and leads to my action. No, no, no, we we think just the reverse, right? We think that whatever the objective circumstances are, it's the judgment of our mind that determines the influence that those objective factors have on my action. By the way, when we think about how we do the analytics of price theory and the same with the time pure time preference theory of interest, we can, of course, with Seder's paribus assumptions do an analysis where by holding everything constant, like the preference rank constant, we can see what the influence of changes in objective circumstances would be Seder's paribus, but that's not right. That's not the same thing. That's an analytical technique, right? That's not an argument about what is the causal factor behind price or behind the rate of interest. Okay, so the pure time preference theory then could be put in this manner, given the way I've stated these other alternatives, that objective circumstances have a dependent effect, an effect on the interest rate that depends upon the judgment that the actors make in their minds about these things. The view of Mises, Rothbard, of Kersner, Garrison, and Frank Federer that I want to turn to now. Now, in the newer debate that's taken place in the last decade, this debate has been upon the question of semantics in the writings of Mises and Rothbard in particular, in expressing the pure time preference theory. It hasn't been a debate upon the substance of the theory, so to speak, but just upon logical conundrums that seem to arise because of the semantics that were used by Mises and Rothbard. And here, as I try to point out in the introduction, it's really Frank Federer's work that's the corrective. Frank Federer actually had a much sounder, semantic expression of the pure time preference theory then, than either Mises or Rothbard. And one of the reasons this hasn't been noticed is because Federer laid this out in his 1904 book, Principles of Economics, that almost none of these other authors read. When they cite Federer, when Mises cites Federer, when Rothbard cites Federer, they always cite his 1915 book, which isn't a new addition of the 1904 book. It's a totally different book. It's Economic Principles. And the book, as Federer explains in the introduction, was written to address applied questions, whereas the earlier book is his theoretical treatment. And in the 1904 book, Federer solves the problems that have been raised in this debate by insisting that time preference must be defined, just like we define preference, in terms of mental judgments of value. What's fundamental is the ends that we have, the satisfactions that we obtain through one course of action relative to another, and not the goods. The goods come in the next step of the argument, right? So we have ends, and then we have means, and the value of the means comes from the value of the ends. So if we want to begin at the beginning, we have to begin with satisfactions, with preference as a valuation. And so Federer points this out, and then he says, when we think about the way in which we value goods at different points in time, they can have different, what I'll call, temporal value. So a good could have a, a given good, like a barrel of oil, could have a different value today, as opposed to six months from today, because people anticipate that the conditions of demand and supply in six months will be different. And what emerges in trade from this are forward prices, futures markets, and so on. And as we all know, futures prices can be either higher than, than spot prices or lower or the same. Because, because we're not dealing with inter-temporal movements here, we're dealing with temporal placement, temporal use, the moment in time when we wish to use the thing, it can have a different value. So Federer points out that this is not true of money, that money we can engage in a pure inter-temporal exchange, because money is the medium of exchange, and therefore doesn't have these different consumer goods uses or producer goods uses that vary with circumstances. So with money, when we trade it inter-temporally, present money for future money, we're trading just on the basis of sooner satisfaction and later satisfaction. We've isolated this time preference element in the inter-temporal structure of the interest rate. And it's this point that answers some of the semantic difficulties that have been raised. Okay, at this point I'll just say thank you to the institute for this project. I think it's a very worthwhile project, and I hope it adds significantly to the debate on time preference. So do I take questions, Mark? Any questions? Yes? Yeah, that is a problematic issue. Federer and these other pure time preference theory economists, they tend not to discuss the notion of a natural rate in the sense that we would have, say, a normal rate of profit or something of this sort. The natural rate is somewhat more of an equilibrium kind of imaginary construct than it is a theoretical type. And so you won't find much of that discussion in the discussion of the pure time preference theory itself, because it's not really trying to deal with that particular issue. That usually comes up in the theory of the business cycle or some more complicated theoretical apparatus. Yes? Is there any distinction to be made between Federer and Kohl? I argue that the only difference is semantic. Mises, I think, has been properly criticized for not hewing entirely to the Federer definition of defining time preference in terms of satisfactions. Both Mises and Rothbard in some places seem to define time preference as the preference for present goods over future goods. As soon as you do that, logical contradictions turn up. Precisely on the grounds that I mentioned before, we have a difference in temporal value of goods. And so when we're engaged in future trade, futures markets, or forward prices, the present prices aren't always commanding a premium, right? The futures prices can be higher or lower or the same. And so this seems to create, okay, so what then is the argument about time preference within the context of this mixing of these elements together? And it's Federer and only Federer that I found that really separates the two elements, the temporal from the intertemporal. He calls this time value, the temporal, and time discount, the intertemporal. Yes? I mentioned it in my introduction. We do not have an excerpt from it. We excerpt a famous Federer article from the Rothbard collection on capital and interest. Because it was set in the context of the debate. He's talking about Fisher. Federer in this article evinces astonishment that Fisher is not a pure time preference theorist. He thought he was. He thought he was on his side in the debate. And this is where we get to that third alternative I was mentioning before, this kind of subtle view that Boombarber and Fisher had that objective factors have an independent effect on interest rate, but only through time preference. And it took a while for Federer to understand then that Fisher's view is different from his. Okay, yes, one more. Yeah, that's a good question. The pure time preference theory only purports to explain what we call the pure rate of interest, the difference in the value of a present satisfaction given the same satisfaction in the future. And so the other components of the market rate of interest like a price premium or an entrepreneurial element or whatever it might be, we have to have a different analysis to add all of that in. So I think the pure time preference theory would apply to any monetary regime as long as people anticipate that the money and use will still be a medium of exchange in the future. Then they can express their intertemporal preferences with this money, and they can also then assess their expectations that its purchasing power will be lower in the future or that there are certain riskiness involved in the exchange of monies or whatever else they might do in making that trade. Okay, thank you very much.