Friedrich August von Hayek, Utility Analysis and Interest (1936)

Hayek’s journal article examines how assumptions about utility and constant tastes shape explanations of interest. Constant tastes, he argues, neither require indifference between present and future goods nor exclude positive interest in a stationary state.

AMONG the assumptions which are traditionally regarded as necessary for the existence of a stationary state, the most difficult to define is that of constant tastes.

Older utility analysis treated utility as an absolute magnitude and inferred identical utility curves at successive dates, with valuation at each date independent of provision for other dates. Böhm-Bawerk consequently needed a psychological undervaluation of future wants to explain why investment stopped before interest disappeared. Schumpeter rejected that discount and denied that positive interest could persist under stationary conditions. Hayek treats these opposed conclusions as products of a shared restrictive premise.

His alternative distinguishes consistency of choice from the content of preferences. Someone whose tastes remain constant chooses consistently when faced with corresponding circumstances at successive moments; this does not prescribe equal present valuations of goods available at different dates. A stable preference for present goods can therefore coexist with constant tastes.

Only because they had assumed that constant tastes implied that equal quantities of a commodity at two dates ought to have the same marginal utility to a person at a particular moment, did they have to introduce a special reason why this was not the case.

Hayek also challenges comparison of a future good’s present valuation with its supposedly true utility when eventually consumed. Relative utilities express choices from a particular temporal standpoint, not measurable quantities independent of that standpoint.

All comparisons of relative utilities are necessarily as from one moment of time, so that all they express are relations between present utilities of present goods and present utilities of future goods.

Hayek develops this argument through indifference maps describing an isolated saver. Initially, the model assumes one composite commodity and one available investment period. Investment is permanent in the sense that the initial commitment is repeated thereafter, generating a continuing net addition to future income. Each investment changes the income position from which the next saving decision is made.

With constant investment returns, productivity fixes the interest rate while preferences determine the amount saved at each step. Accumulation can stop because investment opportunities are exhausted, but also while returns remain positive if the saver values present income sufficiently highly relative to further future additions. Stationary equilibrium with positive interest thus requires no inconsistency in tastes.

Diminishing returns complicate the diagram but sharpen the causal argument. Over a short interval, saving a larger fraction of current income can substantially increase the sacrifice involved, while the resulting investment changes the return on accumulated capital comparatively little. Willingness to postpone consumption therefore adjusts to a relatively stable productive return. Time-preference principally governs the pace of accumulation; productivity has the leading role in determining interest while saving continues.

The stationary endpoint requires a different emphasis. Time-preference helps determine where accumulation finally stops, but its importance there does not establish an equivalent role throughout the preceding process. Saving can continue even when preferences between equal present and future income streams are neutral or favor the future. Positive interest during accumulation consequently need not indicate a desire to anticipate future income.

Hayek’s conclusion favors Wicksell’s emphasis on productivity, acknowledges Knight’s clarification, and criticizes Fisher’s language of impatience insofar as it suggests an independently given psychological rate determining interest. Within a nonmonetary abstraction, the article distinguishes stable preferences, the pace of saving, and the interest rate. The process of accumulation, rather than only the conditions under which it ceases, becomes the central explanatory problem.