"The Cambridge critics of the mainstream explanation of interest theory were right: only under very special conditions can interest be viewed as the marginal product of capital. However, they were wrong in condemning the marginal approach altogether. As the pioneers of the marginal revolution knew full well, the real interest rate is first and foremost a reflection of the higher subjective valuation of present versus future consumption goods. Starting from this point - rather than the dubious equality with the marginal product of capital - the ethical defense of interest payments follows quite simply." -- Robert P. Murphy (2007) "Interest and the Marginal Product of Capital: A Critique of Samuelson", Journal of the History of Economic Thought, V. 29, N. 4: 453 - 464Murphy does not justify this conclusion. His article analyzes neither intertemporal subjective valuations nor ethics.
I also don't think Murphy really justifies his hostility to mathematics:
"I hope to convince the reader that typical mainstream neoclassicals left themselves open to their Cambridge critics ... because their fascination with mathematical models led many of them to forget the insights of earlier thinkers." -- Robert P. Murphy (2007).Murphy does argue well that forgetfulness is displayed. He doesn't show that this is because of mathematics. One can argue that a problem with mainstream economics is not mathematics as such. It is rather the inappropriate insistence on mathematics always and a refusal to use more sophisticated mathematics for theoretical clarification in economics.
I might as well point out that I agree with Murphy on some points, in addition to his refusal to accept the equality of the rate of interest and the marginal product of capital. For example, I think Böhm-Bawerk was insightful in his criticisms of the naive productivity theory of interest. I have read neither von Thünen nor Samuelson's defense of von Thünen against Böhm-Bawerk. Murphy's presentation of Samuelson leads me to think that Samuelson's defense lost. But I don't see the problem with Samuelson's defense being necessarily the assumption of a steady-state, as opposed to the assumption of a one good model.
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"As the pioneers of the marginal revolution knew full well, the real interest rate is first and foremost a reflection of the higher subjective valuation of present versus future consumption goods."
And their critics knew full well that "the reflection of the higher subjective valuation of present versus future consumption goods" is dependent on your economic class and general social situation.
Did not Senior, without thinking too much about the implications, state that "the worse educated" classes "are always the most improvident, and consequently the least abstinent." Or, to use a more modern source, "the major problem with the lower-class poor is irresponsible present-mindedness." (Murray Rothbard)
But I prefer Proudhon's critique that the loaning of capital "does not involve an actual sacrifice on the part of the capitalist" and so "does not deprive himself. . . of the capital which be lends. He lends it, on the contrary, precisely because the loan is not a deprivation to him; he lends it because he has no use for it himself, being sufficiently provided with capital without it; be lends it, finally, because he neither intends nor is able to make it valuable to him personally, -- because, if he should keep it in his own hands, this capital, sterile by nature, would remain sterile, whereas, by its loan and the resulting interest, it yields a profit which enables the capitalist to live without working. Now, to live without working is, in political as well as moral economy, a contradictory proposition, an impossible thing."
So, the rich can afford to have a higher subjective valuation. Why they should be rewarded for simply being rich was lost on many... and still is...
"Starting from this point - rather than the dubious equality with the marginal product of capital - the ethical defense of interest payments follows quite simply."
Rather, starting from the recognition that inequality is the key then the ethical critique of interest payments follows quite simply...
Iain
An Anarchist FAQ
And may I also add this quote from Joan Robinson:
"The notion that human beings discount the future certainly seems to correspond to everyone's subjective experience, but the conclusion drawn from it is a non sequitor, for most people have enough sense to want to be able to exercise consuming power as long as fate permits, and many people are in the situation of having a higher income in the present than they expect in the future (salary earners will have to retire, business may be better now than it seems likely to be later, etc.) and many look beyond their own lifetime and wish to leave consuming power to their heirs. Thus a great many . . . are eagerly looking for a reliable vehicle to carry purchasing power into the future . . . It is impossible to say what price would rule if there were a market for present versus future purchasing power, unaffected by any other influence except the desires of individuals about the time-pattern of their consumption. It might will be such a market would normally yield a negative rate of discount . . .
"The rate of interest is normally positive for a quite different reason. Present purchasing power is valuable partly because, under the capitalist rules of the game, it permits its owner . . . to employ labour and undertake production which will yield a surplus of receipts over costs. In an economy in which the rate of profit is expected to be positive, the rate of interest is positive . . . [and so] the present value of purchasing power exceeds its future value to the corresponding extent. . . This is nothing whatever to do with the subjective rate of discount of the future of the individual concerned. . ." [The Accumulation of Capital, p. 395]
I guess Robinson's point is partly the Keynesian one that another decision must be made after the decision to save. One must decide how to carry the purchasing power forward. Only if the future, financial institutions, and firms producing commodities were utterly transparent would the rate of interest be purely a phenomenon of time preference.
I once had a discussion with somebody who suggested that if I did not discount the future, I should send him something like $1000 for a promise to be paid $1000 a year hence. I replied that since I would not do this because I knew I could use my $1000 for a promise to be paid $1050 a year later. In a sense, my interlocutor was asking me to pay above the market value for a commodity available to me.
"I replied that since I would not do this because I knew I could use my $1000 for a promise to be paid $1050 a year later. In a sense, my interlocutor was asking me to pay above the market value for a commodity available to me."
But wouldn't Bohm-Bawerk ask why is the spread present? Why isn't it a pure arbitrage oportunity, why won't suppliers of the 1000 bid up the price of the promise ro 1049,99?
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