i just been reading:A defense of the traditional austrian theory of interestby paul cwikin the essay Cwik qoutes Hulsmann who had written:When I lend 100 ounces of gold now to receive 90 ounces in one year, I therebydemonstrate my preference for having these 90 ounces from my debtor sooner ratherthan later. It is true that it seems to be pointless to lend money at –10 percent. Whyindeed should a man find it valuable at all to give up 100 ounces of gold now, only toreceive a mere 90 ounces back at some point in the future? Why should he not justkeep the money rather than make such a contract? These are of course very goodquestions, but Mises’s time preference theory does not answer them.cwik says:The example of an exchange of 100 present dollars for 90 future dollars is oddbecause of Hülsmann’s acknowledgment that time-preference is a universal condition ofhuman action. The conditions that would make 90 future dollars preferable to 100present dollars must be such that a state of change must exist between these two timeperiods. Thus, this example violates the ceteris paribus assumption. It commits the sameerror that is explained above in the section on “Knowing One’s Future Goods.”Hülsmann fails to explain how such examples are not generalizable and thus failsto make his argument. This argument merits more attention and should be explored infurther research, but as it stands now, it is not a valid criticism against the traditionalAustrian theory.The sentence which catches my eye here is: The conditions that would make 90 future dollars preferable to 100present dollars must be such that a state of change must exist between these two times.it would seem that cwik has in mind a state of affairs change such that deflation has occured so in a year 90$ might have the same purchasing power as 110$ does 'now' and that such a change would justify the apparent paradox.
thoughts?
But then, if we can think of other scenarios, that dont involve such state changes, would that give hulsmann more power?im thinking if for example, say John has 100$.John is at a hangout when the neighborhood bully can be seen approaching from a distance, with no means of escape John is afraid that , as in times past, the Bully will rifle through his possessions and make off with his wealth. wishing to divest himself of the funds quickly before the bully returns john strikes a deal with an honest fellow who is off the bullys radar. here, hold these 100$ for me, and i'll let you keep 10 when you give me 90$ back. just hold it for 10minutes for me. and so the bully comes, finds no money, and John is restored to his remaining 90$. in accounting terms he has suffered a 10$ loss, or negative interest. in terms of 'gain' however the by choosing not to risk losing 100$ which would mean having 0$ has been avoided so he is 90$ the gainer. in terms of interest John has used the less avlued means (100$ that would evaporate to nothing) to achieve his higher valued end (90$ that can be relied on) and such reaps the interes that is his subjective value spread between the two things exchanged. in this short interval time that would contain the event the purchasing power of the us dollar remained the same.did this make any sense? im trying to get my head around notions of profit and interest in as technical a form as i can manage. and i mafraid to say time preference theory might have the better of me...anyone willing to tutor me about the cutting edge of interest theory austrian style? what of the argument between Rothbard and Reisman on profits /interest rate in an economy declining to zero, or remaining positive.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
The example you mentioned is also a case were ceteris are imparibus, hence making Cwik's point for him again.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
nirgrahamUK:The conditions that would make 90 future dollars preferable to 100present dollars must be such that a state of change must exist between these two times.
Yeah, why would someone give up current consumption for something less valuable in the future?
In the first example I could buy 10 chickens today or loan the money out and buy 9 chickens in a year if nothing changed. Not only does this go against time preference of a good today is more valuable than a good in the future but doesn't make any sense considering the fact that there is negative compensation for losing control over their assets over the time of the 'loan'.
Who wouldn't take a deal from someone that pays you to have complete control over their money for a year.
I'm pretty sure that Mises’s time preference theory also doesn't specifically deal with an equally realistic example of catching a leprecaun and getting his pot of gold but that doesn't invalidate his theory.
thanks for the suggestions im just trying to get a grip on this, my gut tells me Hulsmann means and ends theory can explain more phenomenon...
thought its obvious you disagree, so hopefully i can learn from discussing with you. i havent made up my mind all that strongly about it either way.
lets say i have 100$ today, in crips $notes, but i have a bizarre phobia of notes, or else i am allergic to the chemicals in their manufacture, then i would benefit from a negative rate of accounting interest, because by subjective value theory, and my end of being free from fear or being free from allergic reaction would give me a benefit over maintaing the means to that that end (the notes whcih can be disposed of) even when added to the other purchase opportunities by holding the dollars, what of this?
and more generally, which austrian scholars should i even consult to get a thorough grounding on this. I remember clicking on a link recently on mises.org on a Rob Murphy article and it had a link to Study Guide for Interest Theory, and i pressed the link and it was dead. and i was dissppointed.
nirgrahamUK:lets say i have 100$ today, in crips $notes, but i have a bizarre phobia of notes, or else i am allergic to the chemicals in their manufacture, then i would benefit from a negative rate of accounting interest, because by subjective value theory, and my end of being free from fear or being free from allergic reaction would give me a benefit over maintaing the means to that that end (the notes whcih can be disposed of) even when added to the other purchase opportunities by holding the dollars, what of this?
I guess you could argue that point in the absence of a healthy market for loanable funds where you have to pay somebody to take them off your hands instead of profiting from it for whatever reason.
Get pretty much the same effect today by purchasing a CD with negative inflation adjusted interest rates.
Whole bunch of stuff to chose from on mises.org.
Do you have a specific question about interest rate theory? You might explore the concept of time preference, a bit. (shameless self-promotion)
Even if there were sound money and no threat of inflation, an interest rate would still manifest itself through the discounting of future with regards to present. Time preference can not be arbitraged away. Although the degree to which time preference manifests itself is individually unique, some degree of preference for present consumption over future consumption is axiomatic...
At its root, interest is fundamentally the price of present goods in terms of future goods.
I would also recommend Hulsmann's Further considerations in the Theory of Interest (mp3). It's a bit heavy, and you might need to listen to it more than once.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
thanks AnoCow, ive certainly picked around the edge of those 300 links, its all a bit slapdash though. oh well, if theres no structured jump off point, i'll perhpas need to order my own!
nirgrahamUK: thanks AnoCow, ive certainly picked around the edge of those 300 links, its all a bit slapdash though. oh well, if theres no structured jump off point, i'll perhpas need to order my own!
Yeah, just a google search.
If you really want to learn just download the pdf of Man, Economy and State and read that section. Ch. 6 I would guess.
david, i understand that time preference does insist that moral agents such as us will only ever act (intentionally), when so acting would bring about our sought after ends by virtue of the means that we employ, Sooner Than, than it would take to achieve our ends if we did not employ our means and delayed acting. (thus internally our subjective interest rate would always be in a positive ratio, but for outsiders it may appear disengeniously as if we held negative interest rate or negative time preference?)
doesnt hulsmanns point apparently still stand?, and contradicts Cwik's instinct, that we might subjectively value an end that to a 3rd party observer they would guess we are crazy and exhibiting negative interest rate, because they are thinking in cardinal or objective value terms, and fail to see that in some circumstances agreeing to recieve back a fraction of a quantity of a good, whose larger part we own now, can be commensurate with time-preference and interest theory, because of the subjective value spread between what we expect to profit subjectively in achieving our end despite the subjective cost of disposing/using/consuming our means?
I'd have to brush up on it, preferably to read the Hulsmann passage that cwik cited. I'm rather surprised that Hulsmann would put such an idea out there, given what I've read/heard of his on the topic. I think the examples mentioned in this thread are not only cases of ceteris imparibus, they are not truly cases where it is appropriate to discuss in terms of interest (e.g., the bully who steals your money.) In these circumstances, it is far more appropriate to view the transaction as payment for services rendered or payment for safekeeping, etc.
Jon, it would be an incredible assistance you would provide in helping identify how the examples are ceteris imparibus?
perhaps i am making a mistake (you surely think i am, i merely am terribly unsure!) but i was thinking ceteris imparibus would be if between time t1 and time t2 some subtle variable which should have been held constant has been allowed to variable hence consitituing the fallacy. yet, at first glance, it seems the xamples cited, do not have such a state change, the considerations which lead to the eccentric effects are to be found in the 'calculating' step of the subjective agent under question, who judges his means and ends all at t1, and decides on a course of action so that by the time t2 comes around, he expects to have improved his circumstance, (to have profited interest)...
http://mises.org/journals/jls/2_2/2_2_4.pdf in Walter Blocks
THE NEGATIVE INTEREST RATE: TOWARD A TAXONOMIC CRITIQUE
am i interpreting correctly that Walter Block is agreeing with Hulsmann, and my own burgeoning thoughts, that what appear to be "negative interest rates" to outside 3rd party observers, can not be mapped on to internal negative time preference in the mind of the agent expressing the rate, who must necessarily have a positive time preferences, and is betrayed in this, by his acting (whic hreveals a propensity to prefer disposing of means to achieving ends) in the way hulsmann write, or perhaps as block may say ( i dread trying to put words in his mouth) the agent prefers present goods to future goods, but if it appears to an outsider that eh doesnt, that is good reason for believing that to the choosing agent the goods are not homogenous.?
I just re-read the quoted passage. It seems to me that what Hulsmann is saying is that the Misesian treatment of time-preferential interest theory is invalidated by such a circumstance (lending 100 today in return for 90 in a year). Hulsmann questions the apparent paradox:"Why should he not just keep the money rather than make such a contract? these are very good questions, but Mises' time preference theory does not answer them."And concludes that since Misesian theory cannot solve this paradox, that the theory is incomplete or invalid. Cwik says, "Not so fast, Jorg." Unless Hulsmann can generalize this scenario, it is not a valid criticism of Austrian theory. Mises' time preference theory does not answer questions that it can not answer. Positive time preference is axiomatic (this is an argument I belive Hulsmann has put forth elsewhere). Unless Hulsmann can demonstrate that positive time preference is not axiomatic, we have to assume that the information given in the problem is not sufficient to solve it, and that one (or more) of our assumptions have changed.You ask, "it would seem that cwik has in mind a state of affairs change such that deflation has occured so in a year 90$ might have the same purchasing power as 110$ does 'now' and that such a change would justify the apparent paradox."This change (a deflation on the order of ~20%) could not justify the apparent paradox, because if the lender had simply held his own money (instead of lending it) his initial 100 oz at T1 would have relative purchasing power of 122 T2 (relative to T1).
What I mean is, I don't even see how interest rates figure into this. I agree with david when he says this is more like payment for a service than anything else. Look at it this way, if paying off the bully would only render satisfaction in the future as opposed to now, would you value that more than immediate satisfaction of ridding of him? Again, a present benefit is preferred to a future one.
thanks for your response dave, (thanks for taking an interest ;-))
I think hulsmann's critique of mises time preference theory, is that given that it is logically possible for an agent to rationally accept a negative rate of "accounting" interest or 'money' interest ((not value interest), that time preference theory as mises has it alone, is not sufficient to explain observed rates of money interest in the world.
i dont yet understand why an exception needs to be 'generalizable', surely an examplary exception is an exception regardless of whether other excpeiton that share a general form can be found ?
doesnt hulsmann agree with time preference theory?, saying in how agents order the values of their means and their ends, betrays their time preference, to have their ends met sooner. Then he can go one to use the subjective value spread between the settled on end and its means (and the foregone ends) to arrive at a subjective interest theory, in a way that mises cant do, as mises is writing about time preference in 'googs', whereas hulsmann is more accurate in talking only about time preference of means and ends. which means mises is over stating what can be said by 'time preference' when applied merely to goods. without introducing means and ends, we cant go as far as we would?
argh. my head hurts.
p.s. my deflation mention now makes me feel like an idiot
Jon Irenicus: What I mean is, I don't even see how interest rates figure into this. I agree with david when he says this is more like payment for a service than anything else. Look at it this way, if paying off the bully would only render satisfaction in the future as opposed to now, would you value that more than immediate satisfaction of ridding of him? Again, a present benefit is preferred to a future one. -Jon
i think it figures in because 'profit' or 'benefit' as you write is synonymous with 'orginary interest' . a value spread between means and ends. that can involve a productive period through time, but can equally be an instantaneous phenomenon ie. when a trade of titles to a good occurs. i think Hulsmann makes precisely this point.
Qoutes -
Smith seeks to attain his end (tomato) by means of his apple, and Jones uses histomato as a means to acquire the apple. Why is it that for Jones the tomato is less valuablethan the apple, and why is it that for Smith the apple is less valuable then thetomato? From the point of view of value imputation theory, this question cannot be
answered. Advocates of this theory would have to hold that for Jones the tomato has
the same value as the apple, because the value of the apple would be fully imputed tothe tomato; and mutatis mutandis the same consideration would apply to the case ofSmith. Thus, the exchange presents us with a paradox. Why would Smith and Jonesengage in their barter if they do not value the price they pay less than the good theyreceive?
Our theory of originary interest delivers the common-sense answer to this question.Smith and Jones do not impute the value of their ends onto their means. Smithvalues his apple (means) less than Jones’s tomato (end), and therefore he desires tomake the exchange. Thus we see that market exchanges are mutually beneficialbecause of originary interest. The services given up in an exchange, and the exchangeitself, are but means to enjoy services that one values more highly than those one surrenders.Again our theory of originary interest leads to a significantly different resultthan the time preference theory. The latter confines the phenomenon of an agiobetween means and ends to those cases in which the use of means and the attainmentof ends do not coincide in time. But there is an agio between means and ends also inspot market exchanges—certainly not an ephemeral phenomenon. It follows that, evenif time preference in some way determined money interest, it would not be the onlydetermining factor, but merely one out of two causes operating to the same effect.
-damn that woute was way long
What is Hulsmann's theory exactly? Try summarize it in your own words. I've not read him, and the quotes don't make much sense divorced from any context.
my interpretation of hulsmann ,is that he is strict about subjective valuationof value of 'goods', and when considerations about inter-temporal exchange of such goods is in question, one must focus ones study on the Means and the Ends of the agent. If there is a time preference, it is just to orient, the ends as superior in subjective value to their means, by the definition of having asigned them with labels 'means and ends' , and also perhaps that achievement of a given end sooner is better than later ceteris parabus.
interest/profit is the subjective value one reaps, in the difference between the end that you get minus the forgeone means and other competing less attractive ends.
So he is trying then to subsume the phenomenon of interest under the general theory of valuation?
i guess so. but obviously Cwik disagrees with him in the details, unless theres been a misunderstanding.
oh well, back to the books......
The problem is that State distortion of the credit market prevents people from making rational "time preference" decisions.
Suppose I put my money in a bank and earn 2% interest. True inflation is 20%-30%. By keeping my money in a checking account, I'm earning a negative inflation-adjusted return.
I can't validly express a preference for consumption later, because none of my investment options yield a return rate greater than 0%.
Even the stock market does not yield a positive inflation-adjusted return!
Corporations can borrow at artificially cheap rates. A corporation may borrow at 6%, while inflation is 20%-30%. Therefore, it makes sense to borrow and build a factory. The consequence is that too many factories are built. The Federal Reserve's interest rate policy tricked corporate management into making bad decisions. There's a boom of factory building, and then a bust when there's too many factories and they can't sell their products and repay their loans. Small businesses are bankrupted by the cycle, but large corporations can withstand the bust phase.
As an individual, if I want to borrow, I have to pay 8% or more, and I can't borrow that much.
As an individual, I have no safe place to store my savings. Even gold and silver are risky. Transaction costs on gold and silver are high, due to State regulation of the market. There's no safe place for me to store my physical gold or silver.
I can't make the rational economic decision to work now and consume later, because the State distorts the credit market.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
fsk: Suppose I put my money in a bank and earn 2% interest. True inflation is 20%-30%. By keeping my money in a checking account, I'm earning a negative inflation-adjusted return. I can't validly express a preference for consumption later, because none of my investment options yield a return rate greater than 0%.
That 20%-30% inflation figure you just mentioned is the rate at which goods (that make up the CPI) are increasing in value against the money... So a valid investment option is simply to buy whatever goods make up the CPI. If you're worried about inflation, buy commodities - the purchase of flour, last year in Germany, would have yeilded a 70% profit (not adjusted for inflation - perhaps a real profit of 60%) when sold at today's prices.
So there are always investment opportunities. When saving cash stops making sense - save another commodity that the government is incapable of inflating (that being most of them - gold and silver you already mentioned, but good old coffee will do).