time preference and interest

[abskebabs]

As I understand, with the pure time preference theory of interest, time preference becomes the sole explanation of interest, with productivity not playing a role at all. Suppose we consider a progressing economy whereby productivity is increasing through technological innovation allowing for the same resources to produce a greater amount of physical output due to more efficient utilisation and less waste.

The capital goods affected by these innovations would have a greater productivity than before and due to the immediate profit they create due to the increase in production would see their prices rise. Accordingly with the PTPT, the difference between their prices and the final outlay from the sale of the products they produce would equate to the interest rate at equilibrium. My question is this:

Would this interest rate be the real rate of interest or the nominal rate(assuming only productivity increases and no money supply increase)? If either, why? I have phrased this post a bit like a neoclassical growth theorist would, I guess that’s the effect of learning the Solow Growth Model and Real business cycle theory, which seem to view tech growth in a limited way of only producing “TFP shocks” corresponding with capital accumulation, leaving out reorientations of structure entirely.

Also, if anyone can point out any good sources on the Pure Time Preference Theory of Interest that would be much appreciated, as I feel I need to scratch my knowledge of it. Rothbard’s chapters on MES are great, but I don’t feel now would be appropriate to drill through them.

[Truth_and_Liberty]

@abskebabs

Also, if anyone can point out any good sources on the Pure Time Preference Theory of Interest that would be much appreciated, as I feel I need to scratch my knowledge of it. Rothbard’s chapters on MES are great, but I don’t feel now would be appropriate to drill through them.

I can provide you two Austrian sources critical of PTTP: Guido Hulsmann and Robert Murphy. Hulsmann’s paper in particular explains the nuances of the PTTP very well. Neither of them support a productivity theory of interest, although I’ll admit I don’t know what that term refers to exactly, not coming from mainstream background myself.

We had a discussion about this here and earlier on the threads linked therein.

[abskebabs]

Thanks for the response. I had a look at your thread, and perhaps should have just posted there. I could sympathise with Esuric when he said:

@Esuric

This is why a pure-time-preference theory of interest ultimately fails to explain all phenomena, and why a comprehensive theory of interest must incorporate productivity alongside time preference. For example, technological innovation increases the demand for investment and therefore loanable funds, which puts upward pressure on the interest rate. But I fail to see how this corresponds to a higher time preference. The fact of the matter is that it elevates the marginal productivity of capital. This doesn’t mean that Bohm-Bawerk and Mises’ critique of the productivity theory is entirely invalid; it’s still true that productivity alone does not guarantee a positive net return on investment.

I also saw BlackNumero’s response to this:

@BlackNumero

Well the problem is that the loanable funds market does not determine the rate of interest, its only one the many markets that reflect the discount on future goods.The interest rate is determined by the supply of P.G for F.G and the net demand for P.G by supplying F.G (the original factors who work on the circulating capital). Their rivalrous bidding that eventually equalizes in the ERE determines the discount on P.G and the price spread. If this price spread has not changed, then neither interest rates nor time preference have changed. If the price spread between stages (the interest rate) has not changed, what is the incentive for producers to borrow at higher rates of interest?

And this also makes sense. Indeed, thinking about both these factors, motivated the question of this thread. I was playing around with a little “model” I constructed to explicitly demonstrate way in which determination of the interest rate occurs, utilising the concepts of time preference and more fundamentally time-horizon. I understand that a rise in the productivity of a particular factor(if we simply assume for now increasing productivity allows for more of a product to be produced rather than new products), would tend to raise the price of that factor in the long run. Via PTPT the price differential between the factor price and the interest return would work out proportionately about the same for that investment as opposed to others. But is this a nominal proportionality or a real one, given invariably that productivity increases will cause the prices of particular consumer goods to fall too and hence affect money’s purchasing power?

I appreciate the subtlety of the PTPT a bit more now I think having learned a little bit of modern macro. For instance in a Robinson Crusoe type model, one could have time preference, but the fundamental factor affecting your return would be the productivity of the factor you’re employing. Replace RC with representative agent, and you’re not too far from why in many macroeconomic treatments interest reduces to marginal productivity of capital.

P.S. I found Hulsmann’s and Murphy’s papers rather strange, but will need to look at them again in the future to make a more studious comment.