 Let's talk on the time preference theory of interest in its critics So I've divided the time between Well, I guess just as the topic goes right between the two First just a introductory development of the idea of time preference and its importance in Economic theory and then in the second part we'll deal with the critics But we're going to deal with the critics in a positive way By looking at how they try to solve the interest rate problem that was posed by Oig and von boom Bob work. So he very famously introduced this this avenue of Debate or argument with respect to the question of the rate of interest and it's a well, it's interesting See how different authors have attempted to You know in different traditions have attempted to Meet this challenge. How do you how do you? wrestle with this Interest rate problem that was posed by boom Bob work. So that'll be the second half now Let me remind you of what we've covered up to this point Covered a lot of ground in economic theory. We've talked about The capital structure and production processes and law of returns and all these technical aspects of production we've of course talked about valuing and Imputation of value so that we see how value moves from the Judgment so we make in our minds to the consumer goods to the producer goods and how all the different production processes or organized especially important in the social setting in order to Direct resources to ends that we value most highly So we've covered the pricing and appraisement economic calculation. I had all of these Aspects of Making an argument and showing how the market economy accomplishes this economizing task But there's one thing that we haven't yet done. That's really essential to the whole apparatus of Explanation of how the market works and that is the element of time and so we'll proceed in the same way we did with Valuing and appraisement we need to proceed by starting with the Mental judgments that we make with respect to time and what those are and you know with the universal principles of Valuing with respect to time happen to be and then we'll talk about how that move or leads to Pricing in the market. So so that's the that's a task of the beginning part of the talk So let's start by making a basic distinction between Temporal aspects of action and inter temporal So the temporal aspects of action deal with the timing of action They deal with the placement of an action in time The moment that we take an action should I do the action today tomorrow the next day If I'm going to do it today, should I do it in the morning or the afternoon or the evening? So on and so forth, right? This is a choice variable for us As human beings we can we can choose to place the action at a particular moment in time As opposed to another moment in time now Why would we do this? Well, obviously we would do this because we think that there is some Advantage there's some greater value From taking the action at one moment in time as opposed to another the same reason we do any action, right? We see that they're two alternatives and one we judge is more valuable and the other less valuable so we see that you know eating lunch at After this talk is more valuable than eating lunch before the talk Because we can hang out with each other and and you know have great discussions And that you know as part of the experience right the conditions under which the action takes place are different at that moment And so it's embellishes the the marginal utility we get from the act right or from the good that we're acting with So that's the basic idea of temporal allocation Now does the does temporal allocation lead to or temporal assessment? Does this lead to any? pricing in the market and well, yeah, sure it leads to forward prices So people can speculate or anticipate Today what they think the price of a good will be in the future or at some moment in the future and Then they can a trade based upon their different entrepreneurial judgments as to you know what that future price will be so temporal considerations that the the judgment that we make subjectively of what we think the value of something will be at this moment in time versus that moment are the Underlying principle from which we get forward prices Now we're not going to deal with forward prices because these are not interest rates and the talk is about interest rates There's the whole point of going over this a little bit just to see that we can make this distinction clearly between Forward prices and interest rates, but for those of you who are not familiar with this This area of economic analysis forward prices are Agreements that people make today to parties will make an agreement today To trade a good at a price at some moment in the time that they stipulate today, right? That's called a forward transaction. That's the forward price Now what we know about forward prices is that they lead they lead to Temporal efficiency in the allocation of the good. So let's say today We have a futures market in oil and a lot of the speculators think that oil is going to become more scarce you know geopolitical Happenings will occur and the oil will be cut off from Iran or whatever and You know in the next few months and then so the oil price is going to be sky-high in six months And so they've got you they've got this six month, you know the expectation of this price way up here in six months And yet today it's down here, right? And so if they make if they can make forward contracts with each other then that price becomes public Just like the spot price it becomes a public public knowledge, right? And now if we've got this price sky-high up here that it seems to be what the speculators are anticipating and And in today's price down here then the act then the people are actually involved in the production and allocation of oil Will know to allocate the oil into the future So they'll just build up stores of it, right and not sell it today They'll reduce the supply today hold it off the market and deliver the supply In anticipation they'll deliver the supply in the future when the price is higher this arbitraging will bring the prices together Which means we've got a more efficient allocation Temporally now of the good we've moved it from where it's lower value to where it's higher valued in time This is a part of the efficiency of the market Okay, but aside from that we won't go into any more about forward transactions and this temporal allocation Because time preference our topic doesn't deal with temporal Allocation and the timing of goods it deals with a different aspect of time And this is how we define time preference then it's the satisfaction of an end sooner is Preferred to the same satisfaction later So that's how we define time preference and we'll deal with some of the nuances of the definition And so forth as we go along in the second half where some of the critics come in but here What we'll just stick with this is the definition. This is the preferred definition if you will and As Ludwig von Mises emphasized this idea of time preference then is embedded in the human condition This is not a psychological Disposition that some people have like being impatient or something like that Impatience of course could or psychological factors could affect the rate of our time preference. So That's the different issue, right? But the but the existence of time preference of always preferring a sooner satisfaction of a given end to a later Satisfaction is embedded in human nature By the way, the companion principle of this we've already seen right? We didn't put it this way but the very idea of of preferring more of a good to less of a good is bound up in the finitude of the human condition It's bound up in the scarcity of the human condition We must in fact prefer more of a good to less of a good that there can't be exceptions to this This is embedded in the human condition the same is true of time preference because we're temporal beings It must be the case that we always prefer the sooner satisfaction to the same satisfaction later This is just embedded in the nature of being temporal So this is the point right time preference then is not a lot like an ancillary thing It's a fundamental feature of all human action just like preference is It's important to grasp this point It the time preference then if we want to state this in a slightly different way It would mean that there would be a premium that we would place on the present the present satisfaction is preferred to the future satisfaction and so there's a premium that we would place on the present satisfaction Compared to the future and then since this is part of the human condition it it It's involved in all instances of of action well that have a time dimension I mean one might imagine Action that has an insignificant time dimension where time preference might not be relevant But aside from that it's always involved. We're always assessing the trade-off of alternatives Not just in terms of our preference for one thing for another but also in terms of our time preference This is a element of all of all of action The other thing to stress here at the very beginning is that like preference itself time preference always forward-looking We're always assessing Anticipating the The value that will obtain from one alternative versus another in our preferences. We're always assessing the Sooner satisfaction versus the later satisfaction of something with respect to before we act right with respect to The future how it would work out If we take one course of action versus another Then we get so what how does this manifest itself on in pricing? Well, this generates then what Mises likes to call the Originary rate of interest or what we might or simply call the pure rate of interest So the pure rate of interest then would be important in determining Intertemporal allocation of things the time structure of production then is the most important Application of time preference. This is not a temporal question, right? When should I produce the steel or something? it's it's the structure of the stages of production and how they're how they're organized and we mine iron and produce steel and then you know Manufacture parts for automobiles and then assemble the car Will will this will this structure of production? How much time will it take will elapse between the start of the Production process and the consumption of the good, right? It's an inter temporal question Okay, so we get we get the Manifestation of time preference in the market Economy would be what again will call the pure rate of interest So we can trace the pure rate of interest back to the Judgments of the human mind. So we gave this schematic remember on Monday The first line then is the was the first part of the schematic where we said, you know their preferences and then People based upon their preferences for things would have demand for goods and supply of the goods And then when they meet and trade the the price would emerge that clears the market So so that's the top line that we've covered already So the same argument would be applied then to time preference Some people have more intense time preference what we call higher time preference They want present satisfaction more urgently than other people compared to future satisfactions And some people have less intense time preference. They have lower time preference as we say and so these two people two groups of people can meet and Mutually satisfy their time preferences the low time preference people can lend to present money to the high time preference people and Both of them have their preferences satisfied then the borrowers are willing to pay interest rates that the lenders are willing to accept and We get mutual satisfaction. So the pure rate of interest would would be Established at the point that clears the what we call the time market for the trade of present money for future money This is how the the argument would run out. Okay, we'll look at some other details of this in a minute And then on the next line. I just want to remind you that The pure rate of interest then would be the discount of the discounted marginal revenue product of Factors of production So when entrepreneurs are considering how much am I willing to pay today to hire this worker who's going to work for me and generate? You know help generate some output in the future that I can sell They'll want to know how physically productive is this worker. They'll want to know what? Revenue will be generated by this physical productivity the marginal revenue product and If they're going to pay in advance, of course, they they're going to discount their payment So they're going to get the revenue from the sale of the output in the future, but they're going to have to pay the worker now Let's say over the next year before the output is sold So the demand that entrepreneurs have for Factors of production if they're paying in advance if they're paying up front Before the output is sold Would then be the discounted marginal revenue product and this again? We had on the big schematic on Monday, but you know, we didn't go into the details of that particular element right what determines the demand that entrepreneurs have for factors of production Then the prices of the producer goods the prices the factors of production would be determined by the Interplay of the of supply and demand to have the owner We have the workers who own the their labor and they offer the labor and we have the entrepreneurs who are demanding it based on their estimate of the discounted marginal revenue products and then the Factor prices the wages would emerge a clear that labor market So you can see that the there's an interest return built into production. This is the point The entrepreneur is always assessing the giving up of present money To pay for the factors of production in anticipation of getting future money From that investment right by selling the output eventually to the consumer So that so that's a basic element of this pricing structure Okay, so this is how it would look like in the Again what we call the time market or what Murray Rothbard calls the time market We had the high time preference people who are demanding present money borrowers and then low time preference people who are Lending or supplying the present money and then they they just come together in markets the standard argument and The market clearly, you know, they trade at the market learning price Remember the argument here is that they trade at the market learning price because that's the price at which all the preferences of the People involved are satisfied And so so that price is superior to any other price and so people are aiming at that right there Imposing that or setting that however you want to say it So this is what we determined the pure rate of interest notice in the pure rate of interest just like the price of any good is is completely determined by subjective valuations Given our circumstances right and we're always in certain circumstances of action but given that The the existence of the price and its level and so on are Traceable back to nothing, but how people subjectively value Action within their given situation. That's it. This is what the argument of time preference And its relationship to the rate of interest the Austrian tradition says Okay now another thing we want to mention here is that and this becomes important again in the debate the critics So we want to emphasize this the intertemporal trade this trade of present money For future money is always in money not in goods There's no intertemporal trade that people engage in in kind Barter goods we don't make loans in You know apples or minced dress shoes or auto factories or Hopefully you see right away why we wouldn't do this well I mean there's some maybe even more obvious reasons why we wouldn't do this but but the Because you know these goods are not a general medium of exchange right and we just prefer that but but there's a sort of Somewhat hidden theoretical reason why this is so If we if we were to try to if people were to try to make intertemporal exchanges in kind in goods Then they would not be there would be no assurance that they could separate out in this intertemporal trade The time preference element of their trade from the temporal Elements what if we tried to make lending and borrowing an oil? Well, but then if we do this we've got the problem that When the loan is going to be paid off in the future the oil could have a different price right? Because the consumption or production demand for it The conditions of it are varied From where they are today and so what we can't we can't then make a pure intertemporal trade with goods Because we couldn't be sure that we were doing this, but we can with money This is because money is neither a producer good nor a consumer good. It's the medium of exchange and a unit of the medium of exchange is Equally serviceable with every other unit Just like I wouldn't care which dollar bill I or I guess it'd be a five dollar bill that I take to buy a cup of coffee in the morning I Don't I don't have a differential preference for one over the other, right? They're completely equally serviceable every unit of money and so every unit of money even intertemporally has this Equally serviceable character to it now again, we'll see their nuances to this that we have to chase down but But hopefully you can see that there's something different here. There's something special about money that allows a Intertemporal trade to be done in money Isolating that this time preference element Isolating the pure rate of interest now now again their nuances that will chase down in just a minute on this Okay, so this is the this is the point Now this is a point of debate and again, we'll take up the some of the points as we go through the second half Okay, so then we want to we want to emphasize this this additional point and I make sure we're Completely see the scope of the argument here by breaking down the time market into its basic components so if we think about the categories of People lending present money in exchange for future money We can break down the the time market into two basic subcategories. They're credit markets and As Murray Rothbard says these are credit transactions where we have an overt or explicit loan that's made and Then the credit markets can be further subdivided into consumer loan markets and producer loan markets and then consumer loan markets could be further broken down as they would be in a you know in Kind of a practical application into the various goods that are bought With the borrowed money, so we have mortgage markets for people who buy houses We have auto loan markets right buying cars with general merchandise markets and credit card markets and so on and a similar thing for producer loans, so we would have you know prime We had the prime interest market. We would have collateralized loans You know bonds that could be offered right and so on and so forth so so that that's how we would Give a topology Theoretically to provide a framework for explaining all of this diversity within the within the credit markets, right? And then there's a capital structure, so as I suggested already entrepreneurs Advanced money to owners of the factors of production and for this They need to earn a rate of interest Otherwise they won't advance the money. They would just lend it out on credit markets, right? So it's they're in business and so they need to Generate this rate of return For making the investment and we've seen already how this is done. They obtained this interest return by paying the workers and the factor owners the discounted marginal revenue product of their factor and Then when the good is sold they earn the marginal revenue product right they earn the full monetary value of the productivity of the worker and they pay the worker the The discounted value they because they're lending the worker Money in advance, so so this is the idea Of you know where the interest rate comes comes from in the capital structure And the other point here that I have on the slide is that the pure rate of interest then would be uniform across all There'd be arbitrage again that would make just like there we talked about the arbitrage in the forward prices There'd be arbitrage across all the different investable activities that would Keep the pure rate of interest the same across all In all of these different investable projects again We'll talk about a nuance with respect to that in a minute but if entrepreneurs could earn 10% by you know investing their funding into let's say Oil shale oil and 5% in You know just regular Pool oil or whatever they call it Then they would begin to shift their investment away from the low interest to the higher interest Areas right and again this would bring the interest returns in those two areas together as they bid more for the factors of production They'd raise their price and shrink the net income and so on so This is just again the normal process of Efficiency in the allocation of resources in the market economy Okay, so that's so we need this detail in order to again proceed and now let's get to this final point on the time preference This kind of introductory material on time preference and this is what I mentioned I was mentioning before about the nuances Okay, so we have this notion of the pure rate of interest that is the Manifestation of time preference But the market rates of interest as we've already seen Aren't always the same So mortgage interest rates aren't the same as credit card interest rates Triple-A corporate bond rates aren't the same as junk bond rates The rate of return on Fracking is not the same as the rate of return on running a bakery And so on and so forth. Well, what are the where does all that diversity come from then if we said before that? Arbitrage tends to make the pure rate of interest the same Okay, well it comes from other factors obviously that are peculiar to these different classes of investments and So again the Ludwig von Mises has a nice presentation of this in human action Where he says it's not just a pure rate of interest, but it's also the duration of the investable project All right, so longer duration Investable projects tend to command higher interest rates than shorter ones because people of time preferences are More readily satisfied in shorter as we said before sooner as opposed to later, right? So if you're going to convince people to lend to you for even later payback the the A premium is higher. This would be the argument and second. There's entrepreneurial uncertainty So these different lines of investment can have different degrees of entrepreneurial difficulty and Anticipating the future accurately and if they do then the funds that are lent, you know The entrepreneurs that are borrowing funds or plowing their own funds into these projects that are more uncertain Have a greater degree of uncertainty. So we don't really know quite as well If it's going to pay off would have to command higher interest rates To draw the funds into those lines of activity then lines of activity where entrepreneur uncertainty is more manageable Then there's what Mises calls the price premium The price premium comes from Cantillon effects through monetary inflation So you've heard explanations of this already, right? We get a monetary inflation comes Into the hands of people in the economy particular people in particular places at particular time and so they can buy the things that they want and the prices of those things will rise First and then the producers of the goods whose prices are rising will get more income And then they'll buy the things that they want and the prices of those things go up and so on and with sort of ripples throughout the economy and it could be that a an entrepreneur is producing in a Market where he's close to the first users of the money If so the right after the fact the rate of return is going to be higher Then then he you know otherwise right and so this is what Mises calls the price premium And then finally there are unanticipated changes in the purchasing power of money This is where we get to the nuance I mentioned before about the equal service ability of a unit of money across time It's quite obvious that there's equal service ability of a unit of money Across markets in the present right but that's because the purchasing power of the unit of money Would have to be the same because I'm either gonna I'm gonna spend it right now But I'm gonna spend it on this good versus that good Purchasing power of money over time doesn't have to be the same does it? Purchasing power of money in the future again could be lower or higher Than it is in the present. So if I'm gonna make a loan contract I have to take account of that right I have to think in my in my mind to make an entrepreneurial judgment What I think the Person power of the money is going to be when I'm paid back If compared to the purchasing power of the money that I'm offering today, right? Now with people as Murray Rothbard pointed out if people if all people in the market in the Time market if everybody in the time market perfectly anticipates the future purchasing power of money Then there'll be no Unanticipated Element there'll be no purchasing power element in the interest rate because they'll act today Perfectly in response to that to that instance, right? And this this premium then would part of it would be this fourth part would be washed away But if it's unanticipated then it will remain right So some people have better anticipation of what the future purchasing power of money is good going to be than other people Then then this premium will rise in the in the market rate of interest So in periods of higher rates of price inflation Market interest rates tend to be higher Because they have this premium built into them because not everybody in the market anticipates that the correct degree of price inflation So that that's another nuance, right? So that's the manner in which then the purchasing power of money is corrected so to speak The differences in the purchasing power of money are Counted for in the assessment that we make intertemporally about taking present money and paying back future money or lending present money and receiving back future money Okay, so now let's go on to the to the second part. This is a boom bovvericks interest rate problem And so this is the problem why is the price of a capital good not bid up by investors or entrepreneurs? To equal the sum of its lifetime marginal revenue products if I know that I can buy a plot of land. Let's say that you know generates It's a farmland and it generates An income of $10,000. I've got a hundred acres or whatever and it generates that income And I think well it's going to keep generating that income as long as they you know tend to it properly I husband the land to properly it's going to take it's going to generate that income for me next year and year after that And year after that year of that year of that year of that year of that So why as an investor would I not pay? You know that the full future Revenue stream to get that to get that land today That that's the that's the question, right? We know that the price of the land will be finite Not infinite as it would be if there were no interest rate the price of the land is going to be finite But why why doesn't it you know, so if I can buy the land if I can buy this hundred acres for $120,000 And it generates all and everybody knows it or has a reasonable expectation. They're you know There's a sort of reasonable spectrum of expectations with respect to what it's going to do in the future Why doesn't another entrepreneur just step in and outbid me and pay a hundred and thirty thousand Hundred forty thousand fifty thousand why not what stops them from doing this right? That's the quit that's very puzzling questions and there's a very excellent way of proceeding on this line of Inquiry about the interest rate. So the to put the point the other way around the owner of capital then receives a permanent income From owning the capital once they once they own the capital they get they get this income that just comes to them, right? It seems to be anomalous Element in the market it'll seem to be yeah, it just it's a surplus income And why should anybody get a surplus income and you can see that the Marxists jump on this, right? So we'll deal with them as a one one critic now We've already seen the answer to that boom bovrat gave and that the Austrians give PT PT is pure time preference theory. So the pure time preference theory says that the surplus income Comes from the discount if I'm going to buy the land I have to pay today And if I pay a hundred fifty thousand dollars today Well, I could have invested the hundred fifty thousand dollars in credit markets on interest and I could get this income, right? I could generate that income So if I'm going to pay a hundred fifty thousand dollars to the land today I have to generate the same income So that's the idea right we pay with the entrepreneurs pay only the discounted marginal revenue product stream To buy the capital good, but they earn the marginal revenue product just like to do for all factors of production So this is not puzzling or anomalous or anything. This is what happens This is about one area where the capitalist entrepreneur generates income Okay Now let's okay go to the the critics So this is the the exploitation theory of interest you may remember in reading some Austrian literature that the boom bavaric smashed this the pieces right the The labor theory of value and the the exploitation theory of interest Was dead from the neck up after boom bavaric wrote about it in the in the late 19th century as he pointed out this argument is based upon the this fallacious labor theory of value which we won't go into the fallacies of it and as Boom bavaric pointed out labor is in fact paid its full value They're not it isn't exploitation. That's just wrong-headed to think this and we can see this quite readily in in a you know a simple Thought experiment Where we asked the question What if late what if the workers instead of being paid up front? What if they just waited for their pay? What if they waited until the good was sold and then got their pay then how much would it be and the answer is well Then it would be its full marginal revenue product or to put the case slightly differently What if they took what if workers took their upfront pay and then to lint it out on interest? Until the good was sold Then they'd have the full marginal revenue product of their of their services, right? So this is not exploitation. This is just it's lending and borrowing right the workers have higher time preference The entrepreneur has lower and they're just mutually satisfying their time preferences and there's no exploitation involved Okay, the productivity theory The productivity theory was advanced Next in chronologically against the time preference theory and Very famous examples of this Irving Fisher Provided some of this and then there were others Paul Samus and Frank Knight or famous Critics of the pure time preference theory on this ground and they say wait a minute, you know capital just generates a physical Flow of output in the future capital is physically productive and the interest rate is just reflecting that physical productivity And so so it's not based on subjective value or anything like that It's it's just it's just a manifestation of the physical productivity of capital Now boom bavarick again, if you know the Austrian literature, you know boom bavarick spent an entire volume of his three volume work on capital and interest Debunking all of the different variations of these theories right there like I don't know 20 variations of the productivity theory You go through them all and smashes it one by one, right? So we can't go through you know do all that work. So this is kind of a truncated version of this So the first point then to to make about well The exam let me back up just a second the example that Irving Fisher gave was let's suppose we have we have this Sailor the sailors on a ship and there's they crash on an island. They're stranded and Then he goes through different scenarios of goods that they have sheep is one of them And so that that's the example I've given here and then hard tacked is another and then figs is a third And you can see what he's going for he's saying look if you have sheep that reproduce and then the sheep flock gets bigger You know 10% bigger every year. You've got productivity and you would have a positive interest rate a positive real interest rate, right if you have hard tack that never Disintegrates and doesn't self-reproduce. Well, then you have a zero interest rate in a hard tack world Because there's no productivity, right if you have a fig world while the figs deteriorate and you'd have a negative interest, right? This is what he says it's just he says, you know, this is just obvious and factual result of the of the physical attributes of the stipulated conditions But as boom bop work points out that this misses the point entirely of course, nobody doubts that there's physical productivity and there could be then You know a physical improvement over time or physical Status or whatever physical deteriorate deterioration But none of none of that has anything to do with the rate of interest again to take a real example. Let's go to the land example again Land is like the sheep The problem with the sheep example is it's a one good economy, right? And so you get into all sorts of Problems trying to work out the logic of a one good economy of which there aren't any so right in the real world So if you have land and land is perpetually productive The rate of return that's earned on an investment in land though is independent of that, right? It's completely independent of its physical productivity. It depends only on people's time preferences It depends only on what people are willing to advance as present money To obtain the future revenue stream that would be generated by that by that physical productivity It's just a monetary question, right? And so if it were physically more productive the the entrepreneurs would be willing to pay more Upfront to buy it and so the rate of return then would be Moderated from the real productivity or as my example puts it This is a CV is capital value. So if we have land the capital value since land is indefinitely productive We're assuming the marginal revenue. It's just calculated as a marginal revenue product divided by the interest rate So if we had a land site that generated ten dollars worth of value at a ten percent interest rate It would have a capital value of a hundred dollars entrepreneurs would be willing to pay a hundred dollars Upfront to get a revenue stream of ten dollars a year at a ten percent rate of return If the going rate of return is ten percent if the going rate of return is five percent Then they're willing to pay two hundred dollars to get a ten per a ten dollar return every year The capital value adjusts in other words to the rate of interest So that the so that every investable project generates exactly the same rate of interest This is the problem with productivity theories or at least the fundamental problem Okay, what about eclectic theories? This is one variation of the neoclassical theory. This is like the Martialian scissors That we mentioned briefly in demand and supply analysis for goods Demand is preferences and supply is a cost of production and the two sort of co-determine The price of a good. This is Marshall's view and so here's a Martialian application to time to interest rates They say demand. Yeah demand for borrowed money is based on time preference But supply is based upon the productivity of capital and so the two jointly determine the rate of interest Now hopefully you can see right away that this has got to be mistaken if the productivity theory itself is wrong then this has to be wrong because the productivity of capital is Whatever its physical productivity its value productivity is always determined by the going rate of interest and so to argue this way You're actually engaged in the fallacy of the vicious circle, right? You're arguing in the circle So so this is no good. We can toss this out right away Here's boom Bob works attempt to explain the rate of interest and boom Bob work makes a critical Misstep that Ludwig von Mises noted He reintroduces productivity into the argument as fundamental And so his argument is yes. Yes, it's time preference that determines the demand and supply for heat called the present goods Not money as we've been doing present goods and that determines the rate of interest And there's subjective factors that enter into time preference just like we have been saying right a person could have high time preference because they're You know, they're impatient for whatever reason psychologically or whatever it might be although boom Bob Rick's subjective factors a little bit more psychologically Psychological claims then then what I've been claiming but the but the basic problem is this value productivity You can't have value productivity until you know the rate of interest as we've already suggested We don't know the value productivity of capital We don't know what the monetary rate of return is going to be by investing in capital until we know the rate of interest And so boom Bob Rick's theory again is no good by introducing that element He's he's given up any kind of a cause and effect argument for the rate of interest This theory is also a neoclassical theory that has been advanced by several Authors And this is the idea that waiting is a factor of production and the interest rate is the payment to the factor of production We call waiting Now by the way, when when I first heard this theory, I thought well, okay, you know that we can kind of I can sort of Accept that premise If but I thought what they meant was in the theory was that waiting meant actual time Yeah, then it sort of you know seems plausible Maybe there's something else wrong with the theory, but that's not what they mean by waiting They define waiting as this supply of present money Waiting is just lending Okay, well, okay, well, okay, then then you the argument just sort of falls apart right because if what they mean by waiting is lending then Time preference determines waiting and then waiting to turn. Yeah determines the rate of interest along with demand for Present money the supply of present money in the demand for present money determine the interest rate If we want to call the supply of present money waiting. Okay. Well, that's not really a very you know a big advance on economic insight Right. That's not very helpful Actually, the other thing that we might say against this you can do this as a homework exercise This will scramble your brains if you try this I guarantee you Try to figure out what the marginal physical product of waiting is if you define waiting as the supply of Credit What then you because all neoclassical economists say that you know agree with the Austrians the they have the marginal productivity theory of factor pricing Right, so if waiting is a factor of production its price has to be determined by the marginal productivity theory of factor pricing Okay, so that I'll leave that as a homework assignment Okay, Bob Murphy has some criticisms of the pure time preference theory this comes from his dissertation and He argues this way he says look they're in lit it and he's quite right about this in the literature There are two definitions of time preference one that we gave at the beginning is in terms of satisfaction Then another that we saw a boom bop work uses and sometimes you see this also in Mises It's present goods versus future goods So so this seems to be this are they the same or how are they related right? We have this problem So Murphy hits on this he's quite correct to point this out Professor Murphy Murphy says as a present satisfaction Then then it's right time preference always means a premium of the present so we can all agree with that that's that's not controversial But as present goods if we define time preferences present goods well then it doesn't necessarily mean that There would be a a premium on the present, right? There's no to have a to have a subjective premium on the on the present doesn't generate a an interest rate in and of itself and to have present goods will generate a Price, but it won't be connected to the premium that we have subjectively There's no reason to think that the two are connected and he's quite right about this We've already seen the solution to this why this is not a very effective criticism It's because we're not trading present goods for future goods in the in the time market We trade present money for future money And money does in fact provide a template upon which we can impress our time preferences purely right without this temporal aspect And so his second criticism is based upon the same kind of Distinction he says look time preference as a satisfaction could generate a premium of the present But it's neither necessary or sufficient Because a premium of the present could arise from different marginal utilities of the good, right? This is we had noticed before and when we talked about the timing of things and the time preference premium could be Overcome if we vow if we have a marginal utility of the future good that's much higher than the present good He's quite right about this But what he overlooks is the fact that This is precisely the reason theoretically that people make Time preference related exchanges inter temporal related exchanges and money and not in goods Okay, so that so again this criticism sort of is beside the point and then dr. Holtzman also has criticisms based upon the same kind of fundamental Distinction between time preferences of satisfaction and time preference as present goods versus future goods So both these criticisms misfire because they don't recognize that Time preference is always expressed in money present money versus future money never goods so Professor Holtzman's argument is more intriguing. He says The larger stock of a future good is preferred to a smaller stock of a present good and Because of this only time preference could explain why we take the present amount, right? That's that's one line of argument one way to put it But then he points out that Mises and others in this line of time preference argument also say that a good in the present is a different good from the good in the future Well, if that's true, then the first line of argument is not is not correct Is it it's not certainly correct, right? It doesn't follow logically if the future good is different from the present good So what if we have more of it? Maybe it's a lousy good All right, it's a different good. Okay, it could be lousy. He's quite right about this is quite right But again intertemporal trade is not in goods It's present money for future money and so it eliminates this this problem that might arise And then he says he again takes another stab at this He says time preferences between two options of choice for the same good. He says this is Mises's view But he's thinking of a good he's thinking of a good like an apple Any good in other words and then he says well look, you know, if that's his view Then he's got a big problem because the value of an apple six months from now can be can be different Right is not it's not expressing just time preference It could be different because of the timing of the apple, you know The circumstances of consuming the apple in the future. It's quite right about this and Mises is sort of Not as clear as he could be on this point. He does sort of interchangeably use this expression of present goods for future goods But if we stick to money present money for future money, then this problem goes away So again, I don't think this is a definitive criticism against the time preference theory, but it's very helpful these criticisms by Professor Murphy and Professor Holtzman have been very helpful in sort of clarifying There's much more work to be done by the way for you young scholars in this area of clarifying Issues related to time preference and interest and financial markets and so on and so forth So at that point, I'll stop. Thank you