Devil’s Advocate: So you started skipping around, hey? You have written about the Intro and a bit of Chapter 1, and now we’re jumping to Chapter 19?
Smiling Dave: Devil, we’re going for the jugular. Chapters 19 and 20 are the hardest ones, so we’re tackling them. Without further ado, here’s Mises, Chapter 19, section 1:
Mises: Thank you Dave.
XIX. THE RATE OF INTEREST
1. The Phenomenon of Interest
It has been shown that time preference is a category
inherent in every human action.
Time preference manifests itself in the phenomenon of originary interest,
i.e., the discount of future goods as against present goods.
DA: Plenty of big words here. What does it all mean?
SD: We begin with Category, a word Mises picked up from reading Kant. Let’s ask Bertrand Russell what it means.
Russell: What, exactly, is meant by the word “category,” whether in Aristotle or in Kant and Hegel, I must confess that I have never been able to understand. I do not myself believe that the term “category” is in any way useful in philosophy, as representing any clear idea.
SD: Elsewhere, Russell talks about “those …general concepts which Kant calls ‘categories.'” So we are going to go with category meaning “concept”, and leave it at that.
DA: So we are talking about the concept of originary interest. And what is that, pray tell?
SD: Interest is a very deep subject, that has confused many since the beginning of time. The latest stumbler was Keynes, who went along with the hoary viewpoint that interest is an unfair, parasitic exploitation that the rich man does to the poor man. He spent his life scheming for ways to force the interest rate be zero forever. In this classical exposition, Mises is going to explain that interest is composed of many layers. Not all layers exist in every situation. But the most basic layer, the interest that is charged in every loan, is what he calls originary interest.
DA: But what about if Smith gives his pal Jones an interest free loan?
SD: Then besides the loan, Smith is also giving Jones charity, waiving the interest.
DA: Some people say the Old Testament agreed with Keynes, because it forbade interest.
SD: Not so, certainly not according to ancient Jewish tradition. The Talmud explains that interest is not theft or extortion, and indeed if someone pays an interest fee he cannot go to court and sue for his money back, as would be the case if his money was stolen or extorted. Also, the Old Testament allows lending Gentiles at interest, although it never allows stealing from anyone.
DA: So why does the Old Testament forbid taking interest?
SD: The Old Testament is full of various forms of charity one is supposed to give. For example when harvesting ones field, one is supposed to leave the corners of the field untouched for the poor to come and take for themselves. The prohibition on interest is actually a form of charity, not binding on non Jews at all.
It is odd that Keynes latched on that one charity. He was not a generous man. I mean, you don’t see Keynes running around insisting that farmers leave the corners of their fields untouched for the poor to take.
DA: But I thought interest is something Smith demands of Jones if Jones wants to borrow his money. What does Mises mean that interest is a concept inherent in every human action. When I make coffee in the morning, where’s the interest?
SD: Would you rather have your coffee sooner than later?
DA: I sure would. Ideally, the stuff would be ready and piping hot the moment I awoke, instead of me having to stumble around setting it up and waiting for the water to boil.
SD: That means you have a time preference. You would rather have the coffee right now than have to wait for it.
DA: Are you kidding? I’d even pay someone a small amount to get up early and make the coffee for me, that’s how intense my time preference is for that coffee.
SD: Mises is saying that time preference happens with everything people do. They always want what they want right now, if possible. Not later.
DA: And if they are willing to pay to have it right away, that’s interest?
SD: That’s what it is from the point of view of the borrower. For the lender, of course, interest is the other side of the coin. It’s what you have to pay someone to relinquish his time preference.
For example, say you are waiting in line at Starbucks, dying for coffee. There is some battle ax of a woman ahead of you in line. You know from experience that she takes her sweet time reading the menu, gossiping with the barista, and in general torturing you as you are Jonesing for your coffee. So you want to cut ahead of her in line. You cannot appeal to her better nature, because she doesn’t have one. So you offer her some money for her to waive her place in line, in other words her right to get the coffee sooner, and give that right to you. According to Mises, you are paying her interest. You are paying her to relinquish her ability to get the coffee right away.
DA: So when Smith borrows money from Jones for a year, he is paying say 5% interest to compensate Jones for cutting ahead of him in line, as it were, for making Jones wait a year before he can spend his own money.
SD: You got it.
DA: This has gotten pretty long, Dave. I mean a thousand words on the first paragraph.
SD: I told you it was deep stuff. To be continued, hopefully.