Markets, Productivity, and Happiness in a Historical Perspective

The Pure Time Preference Theory: A Neoclassical Critique

Potuzak Pavel, Prague University of Economics and Business

This paper explores the Austrian pure time preference theory, which states that the interest depends on the intertemporal subjective valuations of people, whereas objective factors are of secondary significance. It presents the Böhm-Bawerk theory of interest, a negative response of Mises and his own positive solution. The key distinction between the two meanings of time preference is introduced. The first is associated with the premium of present goods as against future goods in the minds of people, the second one with the a priori preference to satisfy the given want earlier rather than later. Fisherian graphical apparatus shows that the subjective exchange ratio between present goods and future goods may take on any value even if the superiority of present satisfaction exists. It is demonstrated that Rothbard’s defense of the PTPT is inconsistent. The paper concludes that the time preference is not sufficient to prevent the natural rate of interest from falling below zero.

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Keywords: Time preference, theory of interest, Austrian school

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