Mises’ interest rate theory
Inspired by Bob Murphy’s thesis against the “pure time preference theory” (see also this series of podcasts) – or blatantly copying it – here are some thoughts on Mises’ most wrong take:
- Mises asserts that the market rate of interest is not the originary rate of interest, because the market rate involves entrepreneurial decisions, risk, uncertainty etc. No one lends money with 100% guarantee that it will be paid back in the market and so. But if that is true, where can we see that originary interest? We’re supposed to account for its existence and be sure that it is logically there in every trade between present and future, because it’s a category of action. But then it seems odd to me that it has anything to do with the actual interest.
- Mises criticizes the notion of “profit” from classical economists because it mashed together gains deriving from speculation, risk, other stuff and originary interest – but that’s only because he assumes originary interest as a given (because it’s a category of action and so on). If he didn’t he could have just not cited originary interest in the list of things that give rise to “profit” and all would be fine.
- Mixing the two points above, it seems very odd to think that we should look for interest as a component of profit. It seems indeed to be very classifical-economist take. It would be still compatible with Mises’sworldview – indeed more compatible – that we looked for profit as a component of interest: when someone lends some 100 and is paid 110 that is profit. Plain simple. Why he did that and why the other person paid isn’t for the economist to analyse, or to dissect the extra 10 into 9 interest, 1 risk remuneration or anything like that. If the borrower hadn’t paid it would be a 100 loss or a 109 loss?
- In other moments, Mises talks about the originary rate of interest being the same for all things: apples and bicycles and anything else. But wasn’t each person supposed to have its own valuation of each good – including goods in the present and in the future? Is Mises going to say that it’s impossible for someone to value an orange in the future more than a bycicle in the future in comparison with these same goods in the present? (The very “more” in the previous sentence shows us that Mises was incurring in cardinal value calculations when coming up with this theory – and I hadn’t noticed it until after I finished typing the phrase.) In other words: what if someone prefers orange, bycicle, bycicle in the future, orange in the future? That doesn’t seem to fit. What is the rate of interest?
- Also, on the point above, what if someone has different rates of interest for goods in different timeframes? For example, someone may prefer a bycicle now a little more than a bycicle tomorrow, but very very much more than a bycicle in two days. That also breaks the notion of “originary interest” as an universal rate.
- Now maybe I misunderstood everything, maybe Mises was talking about originary interest as a rate defined by the market. And he clearly says that. That if the rate of interest is bigger on some market entrepreneurs will invest capital in that one until it equalizes with rates in other markets. But all that fits better with the plain notion of profit than with this poorly-crafted notion of originary interest. If you’re up to defining and (Mises forbid?) measuring the neutral rate of interest you’ll have to arbitrarily choose some businesses to be part of the “market” while excluding others.
- By the way, wasn’t originary interest a category of action? How can a category of action be defined and ultimately fixed by entrepreneurial action in a market?