• Unit 4: Interest Rates

    With the foundation laid in Unit 3, we can now look into how interest rates are formed. Focusing on the important role of time preference, Unit 4 discusses the work of Mises on originary interest and the distinct difference between interest and profit. The work of Murray Rothbard is then discussed with a focus on the capitalist's important role in production and the discounting of future vs. present goods. Finally, we take a look at the history of interest rates and the work of Joseph Schumpeter.

    Completing this unit should take you approximately 2 hours.

    • Upon successful completion of this unit, you will be able to:

      • explain originary interest as the discount of future goods against present goods;
      • analyze the difference between profit and interest as defined by Mises;
      • explain the importance and function of the capitalist in the production of goods;
      • describe how interest rates can emerge on the market as a result of valuations of individual people; and
      • explain how the law of time preference dictates that present money is worth more than present expectations of the same amount of future money.

    • 4.1: Lecture

      • Lecture Page

        In general, Austrian theory assumes that social time preferences determine the relationship between total consumption and total savings, and thus the amount of total investment expenditure. Menger and Mises argued that individual time preferences determine interest rates. As a rule, current products are valued higher than future products. This is because creditors give up some of their current profits. So, the interest rate phenomenon is a cost that the creditor has to bear. Watch this lecture to examine how interest rates are formed on the market and the role of time preference in this process.

        Topics covered include:

        • Originary interest
        • Profit vs. interest 
        • The history of interest rates
        • The capitalist's role in production
        • The value of present vs. future goods

        Key points:

        • Interest is a naturally emergent spontaneous phenomenon
        • Without someone providing the capital, no production could be possible
        • Present money is worth more than present expectations of the same amount of future money
        • Time preference manifests in originary interest: discount of future goods against present goods

    • 4.2: Discussion

      • Discussion Page

        Since you have watched the video lecture for unit 4, it's time to watch Saifedean moderate a discussion on the unit's theme by addressing questions asked by your fellow classmates. As you watch the discussion unfold, take notes to help you retain information. Make sure you watch the entire discussion seminar video; otherwise, you may skip over important points. To get the best learning experience and mastery of the major concepts covered in this unit, you'll want to watch all videos in their entirety.

        Topics discussed include:

        • Interest, deflation, and how this could impact productivity
        • How Bitcoin's deflationary properties could impact capital markets • The effects of increases and decreases in the money supply in an economy
        • How a mismatch in individual time preference causes lending and borrowing