In the Interest of Time: Psychological Theory of Interest and Rent

Abstract

This chapter discusses the theory of rent and interest developed by Frank Fetter and Irving Fisher that pushes the application of subjective and marginalist theory of distribution one step further. Irving Fischer and Frank Fetter independently developed the pure time preference theory of interest, purging it of all the remnants of the old productivity analysis inherited from Bohm-Bawerk. The chapter reviews classical Ricardian theory of rent, with Marshallian limited revision, and continues with Fetter’s criticisms of both Marshall and Ricardo and his positive theory of rent. This theory abolishes the division of income into three categories and redefines rent as a unit price of a factor service, offering a unified theory of factor pricing and erasing the economic difference between land and capital. Any durable good that will earn income in the future is paid its full rental price, discounted by the social rate of time preferences (which is the pure or “originary” interest rate). This way Fetter developed a theory of rent as a theory of factor price determination, embracing all three factors of production within it (land, labor and capital). Fetter’s analytical separation of rent as a consequence of marginal factor productivity (where Bohm’s roundaboutness is relevant) and interest as a consequence of marginal time evaluation (where it is not) are emphasized throughout the chapter, as well as Fischer’s early pure time preference theory, unfortunately abandoned in his later works.