Murray N. Rothbard, “Time Preference”

Murray N. Rothbard’s dictionary article, originally published in 1987 and republished in the 2008 second edition of The New Palgrave Dictionary of Economics, combines conceptual exposition with a selective history of interest theory. Its governing thesis is that the preference for present over future goods determines the pure rate of interest throughout the economy. Rothbard treats lending and production as instances of the same intertemporal exchange: capitalists advance present money in return for expected future receipts.

Long-run profit rates and rates of return on capital are therefore forms of interest rate.

This identification distinguishes interest from entrepreneurial profit and loss, which disappear in the general equilibrium toward which competitive activity tends. Interest persists because present resources and expectations of future resources have different subjective values.

The historical account begins with scholastic efforts to justify returns on capital while condemning interest on riskless loans. Rothbard finds anticipations of time preference in Summenhart’s defence of discounted debt, Azpilcueta’s comparison of immediately usable goods with future claims, and Lottini’s account of the privileged immediacy of present satisfactions. Galiani subsequently understood interest through an analogy between spatially distant currencies and temporally distant money. The conceptual advance lies in comparing valuations rather than physical quantities:

What is being equated is not physical properties, but subjective values in the minds of individuals.

Turgot receives particular emphasis as an overlooked precursor of Austrian capital theory. A lender exchanges available money for a promise, not simply one quantity of metal for another; interest compensates for the difference in their present usefulness. Rothbard also credits Turgot with capitalization—the valuation of durable goods through discounted expected returns—and with explaining why monetary expansion need not have a uniform effect on interest. Its consequences depend on whether recipients favour saving or consumption. Rothbard’s criticism of Böhm-Bawerk’s dismissal of Turgot makes the historical narrative an argument about neglected intellectual priority.

The nineteenth-century sequence distinguishes recognizing time preference from making it explain interest. Bailey articulated the preference for present enjoyment without developing an interest theory. Longfield interpreted the capitalist’s return as the discount workers accept for immediate payment. Rae connected longer production processes, greater productivity, and willingness to wait, while attributing differences in thrift to cultural and psychological dispositions. Menger incorporated time preference into value theory but did not extend it to interest.

Böhm-Bawerk occupies the turning point in Rothbard’s account. Although his historical critique attacked productivity theories, his positive theory combined time preference with the greater productivity of longer production processes. Fisher increasingly emphasized productivity as well. Rothbard argues that this combination fractured the explanation of interest by assigning time preference chiefly to consumer lending and saving, while using productivity to explain producers’ demand for funds.

Hence, modern interest theory fails to integrate interest on consumer loans and producers’ returns into a coherent explanation.

Fetter supplies Rothbard’s preferred resolution. Marginal productivity determines factor rental prices, whereas time preference determines the rate at which future rents are discounted. Capital goods themselves are future goods because their value derives from expected eventual consumption. Their productivity therefore cannot independently explain the premium on present goods. Rothbard reinforces this distinction by criticizing textbook diagrams that substitute an interest rate for a factor price:

But the analog on the y-axis should not be interest, which is a ratio and not a price, but rather the rental price (price per unit time) of a capital good.

The article ends with Mises’s adoption and modification of Fetter’s theory. On Rothbard’s account, Mises removed the moral condemnation of impatience and rejected Fetter’s allowance for negative time preference, deriving a positive rate from purposeful action and the wish to attain an end sooner. The entry thus culminates in a defence of pure time-preference theory. Its significance lies in joining a revisionist genealogy to a precise conceptual distinction: productive services explain rents, discounting explains capital values, and the preference for present satisfaction explains interest.