Friedrich August von Hayek, Time-Preference and Productivity: A Reconsideration (1945)

Hayek’s journal article revises his account of the relative importance of productivity and time preference in determining the marginal return on investment. Its central distinction is between an evenly progressing economy, where capital accumulation fulfils expectations, and an economy whose capital structure has been shaped by expectations of investment that subsequently fail. The argument proceeds from a reassessment of his position in The Pure Theory of Capital, through a graphical exposition, to the consequences of interrupted investment for interest rates. Hayek retains the productivity-centred explanation for steady accumulation but rejects its extension to movements that leave existing projects without sufficient resources for completion.

The opening places this correction within a theoretical dispute. Böhm-Bawerk, Fisher, Fetter, and Mises emphasized time preference, whereas Wicksell and Knight stressed productivity. Hayek had sided with the latter, persuaded particularly by Knight, but now identifies an equilibrium assumption surviving within his own attempt to develop a dynamic capital theory:

Professor Knight's argument, although it seems to me still to prove its point so long as we confine ourselves to the consideration of an evenly progressing economy, does not necessarily apply to one in which the capital structure is not in full equilibrium.

This qualification also matters for interpreting the historical movement of interest rates. Their fluctuations above a relatively stable minimum might suggest that monetary disturbances explain the fluctuations, while an unwillingness to save at low returns explains the floor. Hayek proposes a different possible reading: investment productivity may remain comparatively stable during expansion yet rise sharply when the supply of capital disappoints expectations. A stable lower level and abrupt upward movements need not therefore have the same explanation. His claim is a theoretical alternative to the monetary interpretation, not an empirical demonstration that monetary influences are absent.

Hayek first restates the case for productivity’s predominance by treating present and future goods as commodities whose relative valuation depends on both demand and opportunities for transformation. He carefully distinguishes the convenient expression “time preference” from a narrowly psychological account of impatience:

I call it rather misleading because the true "time preference" of individuals is, of course, only one of the factors determining this demand position, the other being the size and distribution of individual incomes.

The diagram expresses these relationships through a transformation curve, showing how present income can become increments of income in future periods, and indifference curves representing demand for present and future goods. During gradual accumulation, the transformation curve is comparatively flat while the indifference curves are more strongly curved. Changes in demand then produce adjustments in investment without substantially changing its marginal productivity. This remains Hayek’s explanation of an economy accumulating capital at a rate that at least meets expectations.

The correction concerns movement in the opposite direction. The existing position cannot be understood merely as an amount of capital that can increase or decrease along an unchanged schedule. It embodies investments already begun in anticipation of further investment. Their expected productivity presupposes completion; additional investment is required even to sustain the position already reached. If available funds fall short, the economy does not return to the situation it would have occupied had a lower rate of investment been anticipated from the beginning. Past expectations have altered the form of the capital structure.

In other words, the existence of "uncompleted investments" (i.e. investments which can be made to produce their full output of consumers' goods only if further investments are made) creates a specially urgent demand for capital, and will tend to raise the marginal productivity of investment much above the level at which it would have been if the supply of capital had never been expected to be higher.

This is the article’s decisive conceptual move. A project’s prospective return can now be attributed to the further investment necessary to complete it, rather than assessed solely against the entire anticipated expenditure. Completion funds consequently acquire an urgency absent from a fresh choice among projects. Hayek’s graphical “kink” represents this dependence on the path already taken: expansion and contraction cannot be described as reversible movements along one transformation curve. Unexpected scarcity confronts an inherited configuration of unfinished investments.

Hayek also insists that saving cannot be treated as a fixed quantity independent of the resulting return. A change in willingness to save must instead appear as a shift in the indifference curves. Because of the kink, a substantial shift can leave the equilibrium quantity of investment at the existing point while changing the marginal valuation there. Within the kink’s limits, time preference determines marginal productivity; beyond them, the sharply curved transformation schedule can still give demand conditions the predominant role.

But as soon as this even progress is held up, and the supply of capital turns out to be less than had been expected, "time preference" takes charge—or, since "the fall in the supply of capital" is merely another form in which we refer to a rise in "time preference", so long as time preference remains constant or falls, the productivity element will be dominant; but whenever "time preference" rises, it takes control and we may get as a result sudden and violent increases in the marginal productivity of investment, and, in consequence, of the rate of interest.

The conclusion is thus conditional rather than a wholesale conversion to the time-preference position. Productivity predominates during uninterrupted progress; demand for present relative to future goods becomes decisive when expected financing fails. The article’s relevance lies in making the timing, incompleteness, and inherited structure of investment essential to interest theory. Hayek closes by saying that the argument can be translated into market demand and supply for future consumers’ goods, but leaves that fuller exposition undeveloped.