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

Source: Saifedean Ammous
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Last modified: Monday, May 20, 2024, 12:57 PM