Time-Preference and Productivity

Ike question I wish here to reconsider is in the first instance the purely theoretical one of the relative importance, in determining the marginal productivity of investment, of the productivity schedule on the one hand and the so-called time-preference factor on the other. It will be remembered that on the whole the Austrians , that is Boehm-Bawerk and his followers like I. Fisher, F. A. Fetter, and particularly L. v. Mises, emphasised the time factor, while Wicksell and F. H. Knight tended to stress almost exclusively the productivity factor. In my Pure Theory of Capital I sided with the latter group, largely persuaded by Professor Knight's arguments. I believe now that in this I have been partly mistaken. Professor Knight's argument, although it seems to me still to prove its point so long as we confine ourselves to the consideration of an evenly progressing economy, does not necessarily apply to one in which the capital structure is not in full equilibrium. Though I had thought that I had made every effort to escape the static approach which has had such an unfortunate effect on the theory of capital, in this particular respect I seem still to have been misled by it-and that in spite of the fact that already earlier I had seen and described part of the phenomenon I am about to discuss.' While the problem would at first appear to possess only theoretical interest, it seems that the answer I am about to suggest may be of some importance for clearing up certain problems raised by the historical course of the rate of interest. The fact that over a long period the rate of interest has fluctuated above a fairly constant basic level gives a certain plausibility to the contention that these fluctuations are connected solely with the monetary factors affecting it and not determined by any similar fluctuations in the underlying real phenomena-except via the changes in the money income, through which the marginal productivity of investment is adjusted to changes in the rate of interest. In particular, the rise of the rate of interest towards the end of a boom would appear, on that view, as determined solely by monetary factors, while the violent fluctuations of the volume of investment, on the other hand, appear to have been taken as prima facie evidence of the rapidity with which the marginal productivity of investment is reduced by any spurt of investment activity. The investment demand curve was thus conceived as being fairly steep, and the fact that the rate of return on investments never fell below a fairly constant minimum was regarded, not as showing that the productivity curve was fairly flat, but as evidence that belowthat minimum people were unwilling to invest; or, to put the point differently, the reason why the rate of interest did not fall below that minimum was sought not on the side of the demand for investible funds, but among the factors determining the supply of such funds. If the theoretical point I am going to make is correct, it would appear that these phenomena are capable of a different interpretation. Before I proceed to state the correction I shall briefly restate the argument in favour of the predominant influence of productivity. The best way is to regard the problem as a special case of the general rule we must apply in deciding whether in a particular situation the relative value of two commodities depends mainly on their relative utilities or on their relative costs. Time preference, of course, in this connection is no more than an abbreviated and rather misleading way of describing the relative strength of the demands for present and future goods respectively. I call it rather misleading because the true time of individuals is, of course, only one of the factors determining this demand position, the other being the size and distribution of individual incomes. But, for the purposes of a brief exposition of the principle, there is a certain advantage in talking in terms of a single individual and his time preference rather than in terms of demand on

Argument (complex analysis) · Capital (architecture) · Economics · Epistemology · Investment (military) · Knight · Macroeconomics · Mathematical economics · Microeconomics · Neoclassical economics · Phenomenon · Political science · Positive economics · Preference · Productivity · Time preference · Economic theories and models · History · Law · Philosophy

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