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Dangers of the One-Good Model: Böhm-Bawerk's Critique of the “Naïve Productivity Theory of Interest”

Published online by Cambridge University Press:  11 June 2009

Robert P. Murphy
Affiliation:
Department of Economics, Hillsdale College, 33 E. College Street, Hillsdale, MI 49242, USA. E-mail: Robert.Murphy@hillsdale.edu.

Extract

In the late nineteenth century, Eugen von Böhm-Bawerk's magisterial work (1881) or capital and interest provided the foundation upon which virtually all modern theories are built. In his first volume, History and Critique of Interest Theories, Böhm-Bawerk classified and (in his mind) refuted all previous explanations. Böhm-Bawerk thought a proper theory of interest must explain the apparent undervaluation of future goods For example, if a machine is expected to yield annual rents of $1,000 for ten years why does it sell now for less than $10,000? To answer this question was to provide a theory of interest, for only with such an undervaluation would it be possible for a capitalist to invest in machines, for example, and reap a flow of returns, over time greater than his initial investment.

Type
Research Article
Copyright
Copyright © The History of Economics Society 2005

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References

REFERENCES

Böhm-Bawerk, E. von (1881) Capital and Interest (South Holland, IL: Libertarian Press, 1959).Google Scholar
Murphy, R. P. (2003) Unexpected Intertemporal Change in Theories of Interest (New York: New York University).Google Scholar
Romer, D. (1996) Advanced Macroeconomics (New York: McGraw-Hill).Google Scholar