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.
The example you mentioned is also a case were ceteris are imparibus, hence making Cwik's point for him again.
-Jon
I cannot be caged. I cannot be controlled. Understand this as you die, ever pathetic, ever fools.
Irenicus' Diaries.
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.
=====
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.?