Rothbard and Mises on Interest: An Exercise in Theoretical Purity

Abstract

The conventional wisdom in economics holds, with Irving Fisher, that interest is explained jointly by the forces of time preference (thrift) and productivity. One school of thought, however, has held stubbornly to the assertion that interest is best understood as a result of time preference alone, time preference as the essential determinant of interest. This is the pure time preference approach to interest. And while most economists are inclined to dismiss this approach out of hand, the pure time preference approach has proved remarkably resilient. Part of the explanation for the persistence of rival theories can be found, not surprisingly, in terminological confusions and ambiguities, for example in deciding among candidates for essential causation. I hope in this article to improve the case for the pure time preference approach to interest by clarifying the argument. It appears that some of the confusion can be attributed to the approach of two theorists, Ludwig von Mises and Murray Rothbard, and to their connecting the time preference approach to their particular a priori methodology.