 Okay, well, the present moment is upon us to begin, and since this talk is about trading present things for future things, as all action is done in the present, we'll begin now. So up to this point, we've talked a lot about, during the week, in different talks, we've discussed a lot about valuing and the principles behind valuing and imputation of value and so on, and how this leads to an arrangement of production and consumption, and then the principle of appraisement, the pricing of things, and then how this leads to economic calculation, and how the economizing structure of action that we can see from thinking about Caruso can be applied to society at large. And so we have a genuine human society, right? We have a social order that operates on the same principle as each individual person. We're economizing together in this cooperative endeavor. Now the one thing we haven't, and there have been some discussion of the implications of the importance of time in action, especially with business cycle theory, so you've been exposed a little bit to that, right? But this talk is going to be about time itself, the valuing of our action with respect to time. Now it's important that we'll do valuing and then we'll do the pricing, right? So just in the same way that we've been proceeding all along in the development of economic theorizing. So how do we value our action with respect to time? What's the logic behind economizing and valuing things? And then how does this lead to prices? How does this, what manifestations do we have in the market of this valuing process? So first we want to start with a distinction between two different ways in which we value our action with respect to time. This is the crucial point from which the confusion that exists in this area can be dispelled. Now I get to most of this, by the way, from Frank Federer. So if you're interested in reading on time preference and what Federer called time value, this distinction that I'm going to make next, he would be the primary source for this. But you find this sort of thing a little less clearly in Mises and in Rothbard. Okay, so Federer points out that there are two different senses in which we value our action with respect to time. One he calls time value, and one he calls time preference. Time value refers to what I call the temporal aspect of action, or what might be more plainly referred to as the timing of action. So if we think about particular actions that we can take, it's quite obvious that one of the choice parameters that we have is when we take the action, the timing of it. Should we take it today or tomorrow or this morning or this afternoon? And of course for some actions it may not matter with respect to the value that we get from the action when we take it. There may be actions like that. But then there are other actions for which timing affects the value that accrues to us. So to just use a mundane example, my wedding anniversary is November 17. So on November 17, 2015, my wife and I will have been married 32 years. Those applause of course are for her, put up with me for 32 years. But to the example, so we'll have a wedding anniversary, we'll celebrate our wedding anniversary right and maybe I get her a bouquet of roses or we do a romantic honeymoon type getaway or something of this sort. But if we do it on November 17 that has a certain value to us that it wouldn't have if we did it on August 1. If I went to her and I said, hey, let's celebrate our anniversary next week. It wouldn't be the same, right? It just has more value depending on when we take it and if heaven forbid I forgot and then said, oh, let's do our anniversary on December 2. The value would be greatly diminished. So it's easy to think of cases like this, right? We understand as soon as we say hopefully we expose this idea, we see that this is so. So naturally when we can economize then our action with respect to its timing, that would be one element then of economizing because we always aim to take an action that gives us a greater value, right? So timing becomes important. This is a temporal, again what I call a temporal aspect of action. Okay, now how does this manifest itself in pricing and appraisement in the market? Well, the different value that we have on the timing of action will be manifest in the market in forward prices. Forward prices occur when parties today, trading partners today, have different expectations of what the price of some good will be at some point in the future, say the price of oil six months from today. So because they have different anticipations of what the future price will be, they can be mutually advantageous trade between them because they have different values of the thing, right? And so people can today, these two parties can today, agree to trade six months in the future at a price they specify today, and that price that they specify today for the trade that they'll do six months from today is called a forward price. And some of you know about financial markets, and there'll be some lectures on financial markets this week as well, Guido Holtzman will do these talks, and he'll talk more about this. We're not going to talk about that because this talk is about the rate of interest and not about forward prices. But I mentioned this because this again is a very important distinction to make. There's a difference between acting in the market on the basis of our expectations of the value of something with respect to its temporal placement. Will oil be worth more six months from today than it is today or a year from today than it is from today, and so on. Now when people trade with respect to that, they're not engaged in setting an interest rate. The price with respect to this element of valuing their action with respect to time is entirely different. Well, I mean, everything's related in the economy, but it's a different kind of price, right? A forward price. Now just one last point about this, forward prices then provide an increase in the efficiency of temporal allocation, just like all prices provide us with a better economic calculation by which we can then economize our actions more fully. So let's say if the forward price for oil, say today, the forward price for trading six months from today increases, well then we have a better economic calculation as to what the traders in this market are anticipating the temporal value of the thing to be, and therefore we can shift the oil from its use today to its use six months from today and gain an economizing move, right? So that's where this all comes in. And again, Guido Holtzmann will speak more to this later in the week. Okay, so now let's turn our attention to our topic, our main topic, which is the interest rate. And here, as we've mentioned already and you're familiar with this, Federer uses the, for the valuing here, he uses the phrase time preference. And time preference refers to the inter-temporal aspect of action as opposed to the temporal, temporal refers to timing, inter-temporal refers to trading present for future, which is not the same thing. They sound kind of similar, but they're actually quite distinct. And so, if we think about the valuing with respect to inter-temporal matters, then we can define time preference. And Federer defines time preference in this fact, in this fashion. It's a preference for a person to have a given satisfaction sooner as opposed to the same satisfaction later. And notice it's defined in terms of value, but given value, a person always prefers to obtain sooner as opposed to later. Now, Mises points out, Federer didn't work this out fully with respect to the integration of this notion into value theory. That was Mises' work later. Mises points out that this idea of time preference is a fundamental praxeological concept of acting. This is not a psychological notion. It's not that we're impatient or that we have physiological needs that we need to satisfy in the present or something like that. Those are all also features of acting. The time preference is something in addition to that, just like preference is, just like preference itself. So Mises puts it this way. He says, because we're finite beings and we always have ends that are unmet because we're incapable of engaging in sufficient production to satisfy all of our ends, because of that, we always prefer more to less. We always prefer more goods to fewer goods. This is just a praxeological necessity of human existence. And so he says, it's the same then is true of us as temporal beings because we're temporal. We always prefer a sooner satisfaction to a later. This is just bound up in the notion of being temporal. And so this is the idea of time preference. Now, if there is time preference in this sense, present satisfaction will always command a premium over the same satisfaction in the future. So we will always prefer the present satisfaction to the equivalent future satisfaction. This will be true then every time we engage in time bound action, every time we give up something in the present to gain something in the future. Then time preference will be in play and we will always discount the future value or place a premium on the present value that we're giving up. So this is the idea. It doesn't matter whether this is a loan contract or someone's giving up present money, the lender, and then being paid back future money from the borrower or a production. Where the saver is investing to buy factors of production, then going through the process of producing and then earning money in the future with the sale of the output. Time preference would enter into those activities. And in fact, all activities for present things are given up for future things. So time preference is ubiquitous in action, just like preference is. Again, you can imagine some sorts of actions where we're not trading present for future things. We're just trading present for present things, okay? So there's no time preference element of that. But for every inter-temporal act, there is. Okay, so this is the distinction we're trying to make, right? The temporal aspects of action, the timing of action, and the forward prices that we mentioned. And then this inter-temporal aspect. And notice if we have an inter-temporal element of action, then we get as a manifestation of this, what Mises like to call the pure rate of interest. So in the market, the appraisement part of valuing, with respect to the inter-temporal dimension of action, is the rate of interest. This is the price, then, for the trading of present money for future money. Okay, now in the next step, let's just provide some overall integration of this basic idea to what we've done so far. So here's the little schematic that shows the logical structure of the arguments that we've made so far, with respect to the prices of consumer goods and producer goods, and now the rate of interest. So on the top part of this schematic, we've already seen the argument earlier in the week that people have preferences for different things, let's say, for apples, for bags of apples. And because their preferences are reversed, some people prefer the bag of apples to the amount of money that is being offered in trade. Some people who have the bag of apples prefer the money to the apples, so they engage in trade, right? There's demand and supply of the consumer goods, say, apples, and then the price of the consumer goods emerges to clear the market, right? So this is the standard argument that you've seen developed earlier in the week. And then, because there is a price for the apples or whatever this consumer good is, there would be a marginal revenue product that's imputed to the factors of production that produce the apples. So there would be an apple orchard, and the apple orchard would have a certain marginal revenue product. It's generating a certain revenue stream from the apple production, right? And so there'd be a demand then that the entrepreneurs would have to, let's say, lease the apple orchard to obtain that marginal revenue product, that production, and then sell the output to the consumer. And then there would be an owner of the apple orchard who would lease the apple orchard, and then the price would emerge, right? So there would be rental prices for the factors of production. Now, the rental prices of the factors of production have one more element to them, and this is the inter-temporal dimension. And this depends whether or not there's an inter-temporal element of the pricing of the factors of production. Depends upon whether or not the entrepreneur pays in advance. So if the apple orchard owner gets his payment from the entrepreneur in advance of the harvesting of the apples and the sale of the apples, then the entrepreneur is lending money upfront, right? He's sacrificing present money in order to obtain future money, and the apple orchard owner is receiving the loan, if you will. He's receiving the present money upfront. So that investment would have to command a rate of interest. Of course, the entrepreneur could form a contract with the apple orchard owner for the apple orchard owner to be paid the marginal revenue product upon the sale of the apples in the future, in other words, in which case there would be no discounting of the rental price. So that just depends, right? So this is the pure rate of interest that would enter into the rental price of the factors of production if money is being advanced to the owners of the factors of production. If workers are being paid their wages in advance of the sale of the output, if other capital goods producers are being paid like a Michelin produces tires and they sell the tires to Honda, if Michelin is paid upfront, then the payment that they get would be discounted, the discounted marginal revenue product of the value of the tires to the car. If they wait until the car is sold to be paid, well, then they get the full marginal revenue product, right? So that's the integration point of the time preference element with the prices of other things. And then the capital value, the capital value of the orchard, the apple orchard to go back to my example here, the price of buying the orchard outright would then be the stream of all the future discounted marginal revenue products that could be earned from owning the apple orchard. And so that's where we get capital value in our schematic, that's our explanation of where capital value comes from. Now, we're not so concerned with these elements. Again, Guido Holtzmann will talk more about these because these are the basis of financial markets. We wanna look more at the bottom line schematic. And here, notice what we're arguing is different people would have different rates of time preference. Some would be more eager to have present satisfaction and some are less eager to have present satisfaction. And so they can engage in mutually advantageous trade. The low time preference individuals can lend to the high time preference individuals at a mutually agreeable interest rate. And then as trade, as these different persons come into markets and begin to interact with each other, the interest rate will adjust to clear the market. So again, this is just a standard analysis that we would have. But you'll notice the one point we wanna stress is it, and you know this just by your own experience, just your own superficial sort of common experience with lending and borrowing. Lending and borrowing is done in money. It's not done in kind. People don't make contracts to lend and borrow in apples or in factories or in apple orchards or dress shoes or right, we lend and borrow in money. And that's very important to this whole analysis. It clears up all sorts of difficulties in this area of time preference theory. Okay, so we can picture this, we call this the time market, where all the lending of present money and the borrowing of present money takes place. So as we, our terminology is we have some people with higher time preference rates. These people are more eager to have their present satisfactions gratified. And then there are other people with lower time preference who are less eager to have present gratification. And the high time preference people are willing to pay premiums that the low time preference people are willing to accept. The borrowers are willing to pay premiums that the lenders are willing to accept. And this premium is the rate of interest, the extra money that's paid when the principle of the loan is paid back. Okay, so that rate of interest is set by the time preference, the underlying time preferences of people so that the market for the exchange of present money for future money clears. That's how the interest rate comes about. That's what the interest rate is. And we'll talk in the second part of the talk, we'll talk about the critics of this view, right? So here we're just sort of laying out what this view is. Okay, now let's dwell just a little bit on this point about money. Why is this trade of present, why is the inter-temporal trade done with money instead of goods? So now we need to hearken back to this distinction we made before about the difference between time value, the timing of action and the temporal aspect and the inter-temporal. If people engaged in inter-temporal trade of apples with apples or with dress shoes or with oil or something else, then there would necessarily be a mixture in the price between the timing element and the inter-temporal, the time preference element. So if people lent and borrowed an oil, then they would have to worry both about what will be the actual market price of oil six months from now when I pay the loan back and what is my inter-temporal time preference discount of the future value of the thing, right? Those two things would be mixed together, right, in their trade. Now with money, those two things are not mixed together. With money, we can isolate, if you will, are the time preference element from the timing element. And this happens perhaps the most distinct way that I can put this is as follows. Money, as you've learned already, is the unit in which economic calculation is conducted. And this unit of money is equally serviceable across all goods, right? At any point in the present, I can use any particular unit of money to make my exchange. It's interchangeably useful. It doesn't matter if I spend it on apples or on men's dress shoes or on gasoline or anything else. I'm holding the medium of exchange and every unit of it is equally serviceable with every other unit. This is also true inter-temporally. That's the point. It's also true inter-temporally. That money has a value as a medium of exchange and the unit of it today to people has exactly the same interchangeably useful aspect to it. Whether they're going to trade it inter-temporally or whether they trade it in the present for goods in the present. And so the unit of money does not have a timing element in it. It doesn't have a time value in it. It is the unit in which economic calculation is done even if the calculation is inter-temporal. So this is what Federer was getting at. This is his insight. And so he explains exactly why it is that all inter-temporal trade is done in money and not in goods, not in kind. So now we've isolated the time preference element in the rate of interest and there's no timing aspect here in the rate of interest at all. This is Federer's position. Okay, now the next thing we need to do before we turn to the issue of the critics of this argument of the pure time preference theory is make one more distinction in the time market between credit markets and the capital structure. So I alluded to this before when people lend the present money in exchange for the anticipation of getting money in the future paid back to them, they can do this in a credit transaction, in a loan contract, or they can do it through production. In other words, through the capital structure. And notice, if all of the things are the same with respect to these different alternatives of just lending to somebody or investing in inputs in order to get output, if the riskiness of the different projects and so on are roughly the same, then it wouldn't matter what a person invested in as a saver, it would command the same interest premium, it would command the same rate of return. As long as the other aspects of the investable projects were considered by the saver investor to be the same. We'll talk in a minute about what happens if they're different, but if they're considered to be the same, then arbitrage would equate the rate of return on investing in the capital structure, investing in production processes, or just lending people money, lending a consumer money on a mortgage and the consumer pays back, or lending on credit card purchases and then the funds are paid back and so on. So there's one sense in which we get a uniform pure rate of interest across all lending of present money to be paid back for future money. Notice that there are important implications of this. One implication of this, and this bears upon the critics of this view, is that production is not necessary to generate interest. It's interesting credit markets. There's no production there. It's just a homeowner who wants to borrow on a mortgage and there's no production. He's just paying back the interest out of his income. He's not engaged in a production process like an entrepreneur is. So we can clearly have interest without production. And then the other thing to note about this is even in production, we don't have to have interest. This is what I mentioned before. If entrepreneurs and the owners of the factors of production that entrepreneurs are hiring agree on a contract for the payment of wages and so on, that stipulates that the workers will be paid when the goods are sold instead of in advance, then there would be no interest. No interest would accrue to the entrepreneur because he's not acting as a capitalist. He's not saving and investing. So notice interest is only paid for the value that accrues to the borrower for advancing the borrower toward his end in time. It's only accruing for that benefit, for satisfying time preference. Okay, this is the argument of the pure time preference theory. Okay, now just again for clarity, let's talk about the other, what I've called here, components of the market rate of interest. So we have the pure rate of interest. This we've talked about. This is the pure rate of interest, the time preference. This is determined by the time preference alone. But we know just cursory observation of markets that different investable projects actually command different rates of return, different interest rates. Interest rates are higher in credit card lending than on mortgages and so on. Well, that's because there's an element of differential entrepreneurial risk or uncertainty involved in the different lending projects. So even though credit card interest rates are higher than mortgage rates, it's not that they're earning, the investors are earning different pure rates of interest. The credit card lender, the lender into the credit card market is simply earning a risk premium. He's earning the pure rate of interest plus a risk premium because, well, he's not gonna be paid back as often, right? The fall's higher and he's got all the costs of trying to get the money back and so on and so forth. There's also a price premium that can emerge in market rates of interest. So market rates of interest are a complex of different causal factors. There's the pure element, the time preference element. There's riskiness. There's a price premium. We see the price premium by the way working right now in Silicon Valley and in the housing market in San Francisco and so on. The Fed is regenerating the boom process through its monetary inflation. And this creates the canty on effects. It creates a differential movements and asset prices. And so some people have invested in these projects before the process begins and they get an extra premium, right? If you would have invested in San Francisco real estate five years ago, you'd be reaping a greater return, not just a pure rate of interest plus whatever risk is associated with that kind of investment, but you'd be earning this price premium, right? So that's another element. In other words, the pure time preference theory is not saying that interest rates are, every interest rate is completely determined just by time preference. You're saying that time preference is a fundamental element in all interest returns but then there are other elements that are layered on top of time preference. And then there can be unanticipated changes in the PPM. So the purchasing power of money inflation and other price inflation could add another element to interest returns. As long as it's unanticipated people might be investing today in production processes and then inflation occurs and they'll earn a higher nominal return if they don't anticipate it. If by the way, as Murray Rothbard pointed out, if they anticipate that there'll be general price inflation then the entrepreneurs will invest more heavily in inputs today to earn what they perceive as a higher rate of return and they'll bid up input prices today and they won't get any higher return, right? So this has to be unanticipated. Okay, so now let's turn to the critics of this view and to do this we're going to use the pedagogy of Boombavar and he famously set out what he called the interest rate problem. And the interest rate problem Boombavar said is why is the price of a capital good not bid up by investors to equal the full stream of the marginal revenue products to be earned in the future? So everybody agrees, economists agree it's not that prices aren't bid up that high. The prime example of this of course would be land. If land prices were bid up to capture the full stream of the marginal revenue product in the future they'd be almost indefinitely high, right? Because land sites in certain places in the world have been in production for thousands of years and will be in production for thousands of more years. And if you add up all the marginal revenue product and pay that out today to buy the land the price would be astronomically high. Why don't people do that? Well, because they die, right? As we said before, they're temporal, people are temporal. How much would you pay today to get a dollar, 50 years from today? Okay, so not very much, right? Even if you're young. And I would pay nothing. Or almost not, I could transfer this money maybe to my heirs, but aside from that it would have no value to me, right? So that's the interest rate problem. And this is true then of all assets. It's potentially true, at least of all assets. If you calculate the stream of the marginal revenue product that would be generated by a factory over its life the price entrepreneurs will pay today is less than the sum of that stream. That's the interest rate problem. Why is that so in other words? What explains that? Okay, well obviously the pure time preference theory explains that as we've already done, right? By time preference. So people have a preference for present satisfaction. So they're not willing to pay to get future money an equivalent amount of present money. They discount the future. And they discount it more heavily the further into the future the money is to be received. So there's a finite value, even a very long lived assets. Okay, so that's not the only, obviously the only explanation of this. There's also the exploitation theory and I put this in on this order because this is the one that Boombaberg famously smashed. This argues that interest is a surplus value of labor that's extracted by the capitalist in the wage negotiation process. The capitalist is a big and powerful and can rip off the workers by extracting some kind of surplus. Now as Boombaberg pointed out, of course this argument is based on the fallacious labor theory of value. But furthermore, to go beyond that it's also the case that labor is actually paid its full marginal revenue product. It's just that the discount, the surplus is for lending the entrepreneur lending to the worker in advance of the sale of the output. So as I put on the PowerPoint side labor could receive its full marginal revenue product if it were willing to wait until the output were sold to be paid or it could do, there's another alternative, right? It could receive its pay right now and then take that pay and lend it out on interest until the goods are sold and then it would have its full marginal revenue product. So there is no exploitation, right? There is no extraction of the value of things that labor has produced by the capitalist. Now we come to the productivity theory of interest that's a little bit more challenging or at least a little bit more common criticism of the pure time preference theory. So we have a lot of economists who, neoclassical types who hold to this view. And here the argument is that capital, these assets generate a flow of productive services. And this flow of productive services generates at least a real rate of return. And there are various examples of this that are given in the literature. You know, Frank Knight has the example, the Crisconium plants and Irving Fisher has this example that I've given on the PowerPoint of sheep. They're also examples of rice that multiplies and so on. So here we have this idea from Fisher that we have a flock of sheep, 100 sheep. And then just through natural processes it becomes 110 sheep a year later. And so on, right? Every year, like 10% more sheep, that's the idea. And so he says, look, that's interest. That's a 10% real return. How is that not interest, isn't it? Okay, well, the pure time preference theory answered to this is that, no, clearly this is not interest. This is not what we mean by interest when we use that word either in common discourse or in our theory. What this is is physical productivity. This is just physical productivity. By the way, these examples, the Crisconium plant and the rice and the sheep and so on, they're more akin not to assets like factories and what have you, but land, right? The closest analogy we would have in the real world is something like this is land that generates an indefinite physical production every year. But we know that land prices aren't, again, indefinitely large, right? In other words, land prices vary depending upon, despite their physical productivity, they vary depending upon market conditions. And so the rate of return that can be earned on land varies. It just depends upon the value that people place upon the future revenue stream and their time preference. So this is what I've done in this line here. This again is capital value. And remember, this is an indefinite production process. And so those of you who are seeing capital value calculations, you know how this works and the rest of you are just gonna have to take my word for this and do a little extra study to get up to speed on this. But the capital value, the asset value for an indefinite period of time for an asset is its marginal revenue product, whatever it generates every year in revenue, just divided by the interest rate. If you have a time bound asset, you would have to sum all this up over the life of the asset. But if it's indefinitely extended like the sheep herd or land again, then the calculation is simple. It just reduces to this. But you'll notice that the rate of return that's earned on this investment if you're going to buy this asset, depends upon the prices, right? And the prices aren't affixed, even though the physical productivity in this example is fixed. Every year we get 10 more sheep. The market price of that output is not fixed. Neither is the market price of the flock of sheep. It's not fixed, right? Just like the market process price, excuse me, of bushels of wheat produced on land is not fixed. Neither is the price of the land. So as long as we have trade in these things, then the prices will adjust so that the rate of return earned by investing in this project is the pure rate of interest. The same as the rate of return on any investable project. So it works, let's say in my first example, where we have a 10% time preference rate, it does work out the way that the proponents of this example would suggest. You would earn in fact a 10% monetary return then by investing in this flock of sheep. But if the time preference rate were 5%, and investors could spend $100 to get a 10% return every year, but the time preference, the going rate of interest in the market were 5%, then they'd flock to buy this, buy the sheep. They'd bid the price of sheep up and the price would be bid up to $200 so that this investment would command the same rate of return as every other investment, right? So again, productivity alone does not generate rates of interest. Productivity generates marginal revenue product, but the rate of interest is determined by time preference. Okay, so productivity is not, again, a very successful criticism. For a further study, by the way, you can think through, I don't have time to go into these other alternatives, but you can think through the logic of them. Fisher gives us sheep, the case we've taken, hard tack. This is a case where there's no productivity, productivity is zero, the hard tack just stays indefinitely in a fixed supply, and figs that deteriorate, negative productivity. And he would say in the figs case, the rate of interest would be negative. But hopefully you can see right away that actually, if you had a production process where the physical output was negative, you were destroying things in the production process, then you wouldn't invest in it, right? No one would invest in this, right? And so there would be no rate of return at all. So you can work through the logic of the different cases on your own, I think. There's an eclectic theory, this again is a fairly standard neoclassical theory. This is time preferences and productivity of capital jointly determine the interest rate. It's kind of a Marchelian sort of argument. And you may have been exposed already to the critique that Austrians give in the Marchelian analysis. They point out that, I think Professor Salerno mentioned, the cost of production are just prices that are determined by imputation of the value of consumer goods. So right, we have the same problem here, right? In other words, productivity of capital or technical factors of the world cannot be independent, determinate causes of human action. What really happens is we have to proceed these things and then judge them and then choose with respect to them. But they don't somehow force us, they don't determine this, deterministically independent of our will and valuing and choosing, do anything and have any effect in the economy. So productivity, if we take productivity to mean just physical productivity, then this is wrong. It violates the ends means causal chain, means cannot determine the value of things independently but only as aids to the end. And if by productivity of capital, this is meant a value productivity, well then this is the fallacy of the vicious circle, right? Because as we already showed, the value of productive factors in fact depends upon the rate of interest. And so this is just the circuit of reasoning. Okay, what about boom bop work? The boom bop work is a little bit more sophisticated than the eclectic, this eclectic theory but it's a similar defects. What the boom bop work says is that yes, like we had before, like the pure time preference theory, we have time preferences determining demand and supply but not of present money, instead present goods. Present goods traded for future goods. And then the premium of present goods relative to future goods is the rate of interest. This is his argument, slightly different. You know, it appears slightly different. And then he points out something that's entirely different from the pure time preference theory. He says, we know logically, analytically what determines time preferences. This again is like saying, we can have a logical, absolute structure of analytical explanation of what determines people's preferences. See, we as Austrians would reject that notion. We don't know what determines people's preferences. All sorts of different things influence our preferences, right? We don't have any sort of determined theory of why a person has the preferences they have. We start with preferences. We start with preferences as a given because the logic can flow from there inexorably to the outcomes in the market. That we're lost to say anything scientifically about how various influences deterministically impact our preferences. So this is, but this is what boom bop work claims. The value productivity of capital. Notice this, this is what he calls an objective factor. But as we've already pointed out, this objective factor suffers from the vicious circle. If it's value productivity, then the value of the productivity already incorporates an interest rate. And so you're saying the interest rate is necessary to determine the interest rate. This is no good, right? This is not logically acceptable. And the subjective factors again are elements that are just psychological or not praxeological. So maybe they exist, maybe they don't. But this doesn't really give us a logical theory of the interest rate. I'm gonna skip over the weighting theory and move to the modern critics, Dr. Murphy and Dr. Holtzman. And they have both made very pointed criticisms of the way that this theory has been developed, the semantic way in which it's been expressed, I should say, in Mises and Rompart. And it's very poignant criticisms that they make that I think our Federer's development of the theory can clear up. So anyway, Dr. Murphy says, there seems to be a dilemma in the two different ways that time preference is defined in the literature. Sometimes it's defined as a present satisfaction, as we pointed out. And he says, if that's the case, of course, time preference would then ensure a premium of the present. So just the argument we made before. But that, he claims, has no connection to inter-temporal trade, at least not of goods. And then he says, if we define, as Boombaverk does, if we define time preference in terms of present goods, then time preference defined that way ensures that there's a connection to inter-temporal trade, but we're not really sure when we trade goods inter-temporally that there'll be a premium of the present. And he's absolutely right about that. So he's correct in what he says here. But hopefully you see already that Federer's line of argument avoids this dilemma. It avoids the dilemma by pointing out, once again, that inter-temporal trade is always in money. It's never in goods, it's always in money. And money isolates the time preference element. And therefore we don't have this dilemma, we can avoid it. And then the second point that he makes is similar. He says time preference as a satisfaction is neither necessary nor sufficient for the positive premium. This is because again, the marginal utility of a good in the present could exceed the marginal utility of the good in the future or vice versa, right? But again, hopefully you can see right away that this is true of goods. Dr. Murphy's correct, this is true of goods, but it's not true of money. And therefore, if inter-temporal trade is always done in money, then the pure time preference theory is free of this criticism. Now, Dr. Holtzman has a similar kind of argument. It's different in structure, but it's similar in style anyway. He says the pure time preference theory literature contains two contradictory claims. One is that a larger stock of a future good is preferred to a smaller stock of a present good. And that's why time preference is necessary to explain why we take the present. Because more is preferred to less, we would always take the future if future goods were preferred to present goods, right? And then he says the second claim is that a good in the present is a different good than the good in the future. So you find this expression in Mises and sometimes in Rothbard. And then he concludes from this, quite rightly he concludes from this, that if the second claim is true, the first of course is not certain, right? If they're different goods then we're not really certain that future goods were comparing apples and apples with future goods and present goods. So he's quite correct. But again, hopefully you can see right away that this problem is completely avoided once we recognize that inter temporal trade is never in goods, it's always in money. And so again, this problem is avoided. It's simply bypassed, right? By recognizing that the temporal trade is goods. And then he gives one last point that again we can address in the same way. He says time preference is between two options of choice for the same good. And he says this is Mises's view, right? A present good in the future, an option for the exact same good, whatever it is in apple or whatever it is. But he points out that in the same literature, the period of interest is always expressed as the relationship between present goods and future goods. Not necessarily the same goods like inputs and outputs, right? And so again, this seems problematic but again, this criticism I think is bypassed once we recognize that it is the same good. It's money, it's not literally present goods like inputs and outputs. It's present money that's used to buy the inputs and it's future money that's received from the sale of the output. That's what's being traded, the money, not the goods themselves, right, but the money. Okay, at this point I'll desist. Thank you. Thank you.