The Theory of Interest. Revision of the Austrian Approach.

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The theory of interest, which is generally accepted in the circles of the Austrian School, is based on the so-called concept of time preference, i.e. the claim that a person prefers the current satisfaction of the needs to their satisfaction in the future. Interest is to be a discount for future satisfaction of needs in relation to their satisfaction at present and to express the extent to which people are willing to postpone meeting some of their needs towards the future. Before I point to the main issue of this concept in more detail, we should look at what Mises exactly writes, stating a number of citations that will be relevant not only to his criticism, but also to our further examination of the issue (Human Action, a bold text added):

“Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not–other things being equal–preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative. …

… The time preference manifests itself in the phenomenon of originary interest, i.e. the discount of future goods as against present goods. …

… As the consumers’ goods are present goods, while the factors of production are means for the production of future goods, and as present goods are valued higher than future goods of the same kind and quantity, the sum thus apportioned, even in the imaginary construction of the evenly rotating economy, falls behind the present price of the consumers’ goods concerned. This difference is the originary interest. …

Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself. …

The valuations resulting in the emergence of originary interest prefer satisfaction in a nearer period of the future to satisfaction of the same kind and extent in a remoter period of the future.”

Mises’s problem in describing interest through time preference is not the time preference itself. A human “must eventually act and not perpetually delay action[1]”, also implying the very existence of time preference. A man perceives himself in time and evaluates the present satisfaction of some of the identified needs more highly as if they were to be satisfied in some remote periods of the future under otherwise unchanged circumstances (i.e. other things being equal). That is a fact. But the question is how to derive the phenomenon of interest from it. The problem in explaining interest through time preference arises because we relate the evaluation in explaining interest to the evaluation of goods in time. However, given the potential changes in value preference over time, it is not possible to make the assumption about evaluating particular goods in time “t” as against time “t + n”. Although Mises talks about goods of the same kind and quality, they do not exist. Goods are changing in value, or more specifically, we change our perception of their value over time. At least empirical experience shows that an apple today and an apple in a year’s time are not the same goods from the point of view of our values. If we then want to keep the argument for deriving interest from time preference, we have to claim that a man either knows the change of his preference scale in time (including other entities), ergo the future. Otherwise, he is not able to judge the future goods that will be of the same kind and quality. The second option offered is that through time preference, a man evaluates, for example, economic good A over time without anticipating its potential value change, i.e. he presumes that the value perception of A will not change over time. From this fact, he could derive the extent of interest. He would then consider perception of the value of A as against the unchanged value perception of A´ in some vision of the future. Given that the value perception of A would be the same and would be split only over time, then interest may be derived, namely as a discount of postponing consumption of the goods valued by interest. It is, however, the argument based on the assumption about the value transfer, or more specifically, objectification of the value of A and A´ over time.

In this sense, Hülsmann’s explanation does not help[2], i.e. that Mises uses the concept of time preference in terms of factual and counterfactual action over time “t”. According to Hülsmann Mises understands time preference to mean that a man assesses economic good A within the factual valuation and within the known present and only a counterfactually notion of A´ in the context of the vision of the future; as if the concept of such value – unchanged economic good A in the future. It is possible, but not sufficient to explain interest. Hülsmann explains that by demonstrating postponement of the preference of current consumption of A to future consumption, the concept of time preference must be included within human action[3]. According to Hülsmann, this does not alter the fact that the origin of monetary interest cannot be explained by time preference. By using the concept of time preference, the difference between the product price and the sum of the prices of the production factors may not be explained in the context of assessing the preference of the product on the basis of time preference. This means that Mises’s theory does not explain the market prices of the goods at the credit exchange. According to Hülsmann, the time preference can only be used to explain that a man considers the current use of economic good A as against the same potential use of A in the future, i.e. factual and counterfactual assessment of how a man chooses, while he prefers an earlier consumption, but it does not explain the second part of man’s action which must be clarified in explaining the theory of interest: the purchase of means of production and the sale of a new product originating from the use of the means of production, i.e. the granting of credit and repayment of principal and interest. Thus the interest itself cannot be derived from such concept. Hülsmann’s criticism of Mises concludes as follows:

It (Mises’s theory) can only account for the value differential between the actual use of a good and the counterfactual (unrealized) future uses of the same good.     

Mises’s defenders, such as Latham or Gunning, responded to Hülsmann’s criticism[4]. According to them, some of Hülsmann’s arguments against the theory of time preference are not sufficiently convincing. Their criticism is of a rational nature. It cannot be claimed that time preference is not part of any decision and action of a man in reality. Hülsmann is unable to sufficiently support his argument that there is no time preference in certain types of action by giving examples of the suicide, the martyr or the warrior who, however, apply the principle of time preference in the context of their set goals (earlier death, sacrifice, glory). Hülsmann also faces the problem of keeping the theory in the spirit of consumption preference in time based on the necessity of survival. Mises did not think of or explain the time preference in this way. According to them, the impact of time preference on interest must therefore be accepted. Mises’s defenders also indicate that Mises understands “the goods of the same kind and quality” to mean a medium of exchange – money, thus trying to keep the theory of interest based on time preference[5]:

Mises’s arguments on time preference are counterfactual; they deal with two possible uses of the same good. Misesian time preference deals with the same good, but Mises points out goods at different places in time are different goods! Time preference is untenable as long as these points are true. If we cannot say 104 future dollars are more valuable than 100 present dollars, Mises’s challenge loses its rhetorical bite. So, are 104 future dollars preferred to 100 present dollars? If the good were anything but money, time preference would be in trouble. Money has certain characteristics that prevent this critique from being problematic.

It would actually be possible on the basis of objectification of assigning a value to money. In analyzing texts by Mises or some of his other followers, I would be inclined to claim that it is just this kind of explanation that Mises also applies[6]. We can also use Guning as an example, because he writes:

Mises’s deduction that a person prefers a present good over a future good is based on the assumption that an individual compares things “of the same kind and quantity.” “Of the same kind” means of identical value in terms of satisfaction, except of course for the time at which they are available. It is a value definition not a physical productivity definition. Hülsmann apparently misunderstands the example and its context. The example refers to money because it is an effort to show that the capitalist saver in the market economy would not always postpone his receipt of money even though he could receive more money in the future by doing so.

A follow-up and inseparably related article concerning the criticism of Mises’s regression theorem and the theory of money deals precisely with this problem[7]. The theory of interest based on the theory of time preference with their application to the money, which is considered the good of the same kind and quality, stems from the objectivistic assumption of “certain objective exchange value of money”, which is, however, not in accordance with the subjective theory of value. Mises seemed to partially leave the money in his ERE concept[8] and not to bring it into the real world. Similarly, this interpretation also faces a historical problem associated with the question that until people have come up with money how they derive interest on the basis of time preference for the use of other goods, which apparently Mises’s defenders do not designate as the goods of the same kind and quality (fur, salt, cattle, Rei Stones).

In his work A Theory of Interest[9], prof. Hülsmann is on the scent of a more remarkable interpretation of the theory of interest in this respect. Interest as a value spread. In the context of the effort to correct Mises, Hülsmann proceeds primarily with an explanation of originary interest, which is, in his opinion, a value spread between the means and the ends, and then clarifies how originary interest actually results in monetary interest. The sections below will prove that such procedure encounters many problems, but first we should look at some important passages of his work:

“Originary interest itself does not have any manifestations in the realm of the objects of human action; it is not an object of action, but a feature of action itself.”…

“Smith and Jones do not impute the value of their ends onto their means. Smith values his apple (means) less than Jones’s tomato (end), and therefore he desires to make the exchange. Thus we see that market exchanges are mutually beneficial because of originary interest.” …

“Originary interest is not a manifestation of human action in the world of physical things, but a structural feature of human action itself or, more precisely, of human labor.” …

“It follows that originary interest, to the extent that it is manifest in the passing of time at all, concerns value spreads between future ends and present means and value spreads between present ends and future means.”

In my opinion, there are two cardinal problems in Hülsmann’s theory. The first is arguing in circles. The problem is also pointed out by his follower Braun[10]. It results from the premise of human action. Action is defined as achievement of the ends through targeted activation of the means. However, Hülsmann defines originary interest as the spread between the ends and means, while pointing out that it is the attribute of action as such. So he actually explains the existence of the spread (originary interest) by the spread itself (originary interest). We have to realize that any action is based on using means to achieving future ends. You cannot therefore explain originary interest which is feature of the action by action itself – choosing achievement of the ends through targeted activation of the means. Braun’s attempt to improve Hülsmann by making psychological gains (in terms of ends) and costs (in terms of means) is equally unsuccessful because he put the formal level of the logical description of action into the psychological field and psychological explanation, thus failing to solve the problem, only describing it from another perspective.

The second consequential problem is that on the one hand, Hülsmann claims that originary interest is the attribute of action as such, its basic feature. On the other hand, he limits its existence only to certain types of action, namely those associated with labour. He must. In his interpretation, originary interest makes no sense in action which, as such, is to be both the means and the ends/ purpose of action, or if the means and the ends coincide with each other in certain types of targeted action. I.e. if action is taken for the action as such, then the means and the ends cannot be distinguished from each other, leading to inability to establish a spread therein; according to Hülsmann, a condition refers to psycho-physical activities, such as playing an instrument for playing an instrument, or other activities, such as walking for walking, dancing for dancing, writing for writing, etc. Either interest is a concept of only a certain type of action and is not a basic feature of action, or it is an essential feature of action, but must then also exist in those types of action that are not connected only with labour.

In this case, Hülsmann is treading on thin ice in terms of defining what he considers human action, where he, in principle, admits a special feature of what action means. He cites Mises as follows (the original italics added by Hülsmann are in bold type):

The employment of the physiological functions and manifestation of human life as a means is called labor. The display of the potentialities of human energy and vital processes which the man whose life they manifest does not use for the attainment of external ends different from the mere running of these processes and from physiological role they play in biological consummation of his own vital economy is not labor; it is simple life.”

But in Hülsmann’s examples above, we must admit purposefulness within the meaning of the whole concept based on the claim that “man acts[11]”. Otherwise, we would have to assert that the aforementioned examples are not a purposeful activity and are a reflexive activity of the body. By placing interest between the means and the ends of action, Hülsmann creates a problem for himself. As if he did not realize that the ends and the means themselves were already phenomena of action; thus action is defined by such phenomena. Placing a spread between them in the form of originary interest is inevitably problematic and leads to the above-mentioned criticism[12].

Hülsmann could theoretically be saved by claiming that interest is the attribute of action as such, i.e. that originary interest is responsible for creating the value scale of an individual. He would thus incorporate interest into action (targeted, goal-oriented activity) which is realized as such in time. Originary interest (a spread between present and future means and ends) could then be what determines such scale in time. However, these are not the lines of argumentation used by Hülsmann, and it is questionable whether such lines of argumentation can be used at all. Hülsmann would have to prove that the so-called originary interest is what EGO uses to establish value differences in time, for example, meat is higher in the value scale than an apple and an apple is higher than a pear, etc. Meat would be higher on the value scale than an apple because of originary interest, which should categorise a given value of the two goods and rank it (on ordinal grounds) in the scale. Then we could declare that originary interest is also applicable to action when it seems that the means and the ends are merging into each other, where it would be the time that separates the means from the ends. Satisfaction of the goal (the end – the psychological joy of dancing) would be gained from the identical activity of dancing (a means) perceived in time continuum where originary interest would be evaluation of the time spent on dancing (the process of changing the means to the ends). But it implies that he would come to the conclusion that interest is, in fact, a reason, cause or reason behind any action; some objective part of the reality. However, in the context of Misesian methodology, it is a problem – all the arguments of praxeology begin with the axiom of action; it is not to be explained by it. The second problem would consist in what actually originary interest is – for some people it would be a free will, for others it could be the reason that distinguishes us from other species of animate beings on earth, etc. Before I proceed to modify Hülsmann’s theory, we should look at what Antal Fekete says about interest.

Inspirational Fekete

Before we start with our own interpretation of the theory of interest, it is good to show why Fekete[13] is inspirational. Prof. Fekete[14] also rejects the explanation of the theory of interest through time preference and comes up with his own premise of the interest theory as the exchange ratio between wealth and income. When describing income and wealth, Fekete uses primarily gold in his argumentation, but also points to the sense of hoarding (creating surpluses, savings) of any goods. He considers gold an objective denominator of value that enters into economic relations, expressing a measure of wealth. He explains that gold hoarding/dishoarding, new gold mining and economic projects determine the basis for origination of an interest rate. Fekete’s perception of the principle of interest is instructive. He approaches interest as an exchange of wealth and income. This means interest is explicitly an intersubjective concept. Thus, in Fekete’s theory, we look at two concepts. The first is the concept of the value and fully subjective range of individuals as such. The second is the concept of exchange itself, which contains interest. Fekete argues that interest is a valuation of exchange, i.e. an intersubjective concept. Unlike Hülsmann, who claims that its origin is to be sought in action itself, i.e. within the human subject.

Fekete claims that it is necessary to compare comparable quantities in time. Fekete also poses a question on interest differently from the others: “What happens when a man with the ability to save part of income and demand for wealth meets another with wealth but who needs income?” In this case, he contrasts saving, or we can also say, wealth accumulation in the form of the most tradeable goods (gold) with the income potential of an entrepreneur who has no wealth to spare to launch his business. The relationship is also based on the real needs of individuals. The entrepreneur needs wealth, and the owner of wealth wants to further benefit from it in the form of income.

He derives from that the exchange relationship without considering the need to know future preference. Income and wealth are although different categories for an individual, but in contrast with another person with opposite demand, the given categories are “offset”. The entrepreneur needs wealth to generate income in time “t”. The owner of wealth needs to secure future income in time “t”. Fekete thus eliminates the problem we describe above in the explanation of interest through time preference. Fekete combines two distinct categories at the same time, but the differences between the categories of “income” and “wealth” are only time- and not content-based. Wealth was once income, and income can become wealth if it is saved. However, gold is the objective denominator for Fekete (just as in the case of Mises, we should remember that Mises objectifies the value perception of the medium of exchange in terms of “certain objective exchange value[15]). In this respect, part of wealth (gold) is thus activated in time to provide income flow (in gold). In other words, part of gold is exchanged for another part of gold in the future (individually arbitrarily large) based on the influence of gold (wealth) on economic relations, or business activities in time.

From Fekete’s point of view, interest rate is then a valuation of that exchange of wealth for the exchange of potential income, or an expression of the effectiveness of such indirect exchange. The exchange may also be equal to zero in Fekete’s approach. If the valuation of such exchange falls to zero, the exchange becomes direct (barter). Wealth then changes to income through its sale – dishoarding, or income turns to wealth by saving – hoarding. Negative interest is then for Fekete the opposite of wealth creation, i.e. wealth destruction.

In Fekete’s argumentation, Mises’s problem in the context of time preference is smartly solved. In the exchange of wealth for income, the exchange is made in a particular “t” time, where the quantities of wealth and income are in contrast to each other, thus creating motivation for exchange. Secondly, the problem of explanation of exchange and interest is here smartly shifted onto the intersubjective level that both entities can approach in terms of contents (wealth / income) and time, without claiming that they know the future or apply interest in terms of time preference to a particular good in time “t” against time “t+1”. I do not know whether Fekete is aware of this key point of his explanation, because this point will be important for our further explanation. The exchange and the resulting interest are a concept per se. But why to criticize Fekete?

The first objection that can be raised against Fekete is that he describes his concept (only) at the level of monetary interest. He is “too far” in his explanation. It is obvious when he says that interest is a valuation of the indirect exchange of wealth for income where he regards it as a higher form of economic cooperation of the entities in a community and writes about zero interest in the case of a direct non-monetary exchange. However, he does not realize that the same “modus operandi” should apply even in the case of a barter if we are to talk about the principles of describing the functioning of interest. In other words, he does not explain whether or not interest is incorporated in the barter exchange when entities exchange, for example, apple for pear in time. Does the same principle apply even in that case? And how?

The second cardinal problem is that he uses gold as an objective denominator of value[16]. Therefore, he can make such assertions about interest and need not think about its origin. Fekete implies that 100 ounces of gold today and 100 ounces of gold in the future are the same goods in terms of value (objectivism). This is wrong. Therefore, he needs to explain neither the origin of interest, nor interest in a barter environment. Our interpretation must respond to this problem.

Looking for Interest

One of the differences I perceive between various approaches in the Austrian school is the approach to how the man sees reality. In Misesian tradition,[17] there is a kind of radical subjectivism. It is a logical consequence of the axiom of action. In my opinion, a more comprehensive view of the problem can be found in Hayek-Pavlík monistic system[18] that, except for subjectivism, explicitly does not omit the influence of other human on the man own thinking as well as the influence of reality on the human subject’s thinking (at least given the fact that the brain is part of reality and the processes of reality take place in the brain); we can call it as intersubjective reflexionism. In simple terms, it means that a person also develops itself through other humans; in the meaning of his thinking, conceptual system, reality views, etc. The foregoing implies that even the value system itself and the valuation and perception of reality are not the result of the human subject’s action as such, but are also explicitly influenced by the value system of other individuals[19].

We will not be “looking for” interest where, in my opinion, it is not, i.e. in the very action of individuals. It will be necessary to look for interest where it only appears and is located – in an intersubjective act of exchange, which is used by entities to meet their needs in an indirect way. The intersubjective level also allows us to avoid arguing in circles. Because we will not describe interest in the context of human action per se, but we will describe it as a result of action (or of an unaware activity of our prehistoric ancestors) provided that it is not a result in subjective terms, but a result from the point of view of two different human; interest would be pointless for one individual; the man approaches it as a concept created only in interaction with another man. This means we shift the explanation onto the level of relationships[20]. Both humans make an exchange that is already an intersubjective concept; it is not direct, but indirect satisfaction of the needs of men. There are two fundamental questions related to this approach: why we can look for interest in interpersonal exchange and why we look for in it.

The question as to why we can seek interest in an interpersonal exchange relates to the fact that the exchange as such is an inherent concept of human thinking stemming from social relations and directly concerns the concept of property rights. It is the concept that every person in a community must inevitably approach, because he is part of a certain community. Therefore, the concept of exchange must be (e.g. similarly to the concept of ownership) an inherent correlation of the thinking of a person living in a community[21]

The question as to why we are looking for in interpersonal exchange is inspired by the fact that the level of interpersonal exchange is implied by the majority of authors who deal with the origin of interest. The example is not only Hülsmann who considers interest a spread between the means/ends (one man) and the means/ends (the other man) and also limits it to action associated with human labour, or Fekete who explains it explicitly by exchange. Even Hülsmann’s critics imply the area of exchange by deriving the origin of interest from the concept of time preference relating to “the goods of the same kind and quality in terms of money”. Since money is an interpersonal medium of exchange in time. It should also be noted that interest is not reflected in other types of economic phenomena, i.e. in empirical reality the phenomenon is and has always been associated with (monetary) exchange[22].

Unlike the implications and connections of interest only with the monetary world, we begin to describe at a non-monetary level – at the level of exchange of goods outside the use of medium of exchange. It is a description of the theoretical construct of interest at the level of barter and barter in time, thus eliminating one of the problems faced by Fekete in describing interest. A description of interest as a value spread at the level of barter exchange also allows us to describe the origin of the existence of such spread that is already expressed in monetary terms. As we will see, shifting the solution to the problem onto the level of exchange also enables us to address several issues and the problem associated with Hülsmann’s interpretation of interest. 

Originary Interest in Non-monetary Exchange

The quest for interest in interpersonal exchange is related to the fact that a man does not perceive himself only here and now, but in a time continuum. He cares not only about the existential particular present, but also about how he will survive the future. The human life is not divided into some sections, where one ends and the other begins[23].

A man makes assumptions about his life in a for him individually imaginable and relevant time continuum. Even the time preferences are thus not associated with any particular time “t” which is more preferable, but with a relevant time period. In some cases it may be a day, at some other time a week, a month, etc., and the idea may not even be limited to the maximum connected with the current potential age of survival; a man also acts in the context of what will remain after his death (a concept of heritage). Self-perception in a time continuum leads to an important phenomenon – the accumulation of savings. In order for a person to act, he needs inevitable savings – surplus goods. No action is possible without them. Hülsmann writes about the topic as follows:

“Action is possible only if the person can live on previously accumulated means of sustenance that are not yet exhausted (“savings”), for example, on the food in his stomach that gives him the energy to engage in his present activities. In short, any single instance of human action, not just long-term production processes, is possible only through savings.”

Action aimed at acquiring surplus goods (total savings which are, in non-monetary communities, made up of the so-called means of sustenance – larger range of heterogeneous goods) is not taken only in the context of preference of a particular and specific present, but also in the context of the fact that a man will live in a for him imaginable and relevant time continuum. Savings which are being accumulated in the form of surpluses are also a sufficient condition for exchange. But not inevitable. The assessment agent is inevitable. Without savings, we would not just enter the exchange process, because we would have nothing to exchange, however, exchange could be present in the mind of a man as an abstract concept[24]. In the process of self-awareness in a time continuum and his existence in a community, a man also faces the objective certainty of that, for example, a surplus of food will be spoiled over time, his body changes over time, he will die, etc. At the same time, he is confronted with uncertainty about the future as such, he knows nothing about.

At the beginning of the development of economic coexistence, people had to face the fact that in some cases the longer they can preserve their accumulated savings in a state suited to satisfying their needs, the more they increase their satisfaction in a time continuum perceived by them, considering that the preserved goods could satisfy their current needs which were identical to those of the past. However, in some other cases, they reflected the exact opposite, i.e. that the preserved goods could not meet their brand new needs. Thus they encountered, for instance, the problem of spoilage of some food accumulated by them in the course of time. However, if they exchanged their food surplus when they had it, they increased satisfaction of the needs of the others who, in return, could meet their needs when their food has long been spoiled. They also had to perceive that their needs changed in time – at least in connection with ageing or having children. Thus a man had to perceive the value changes that are taking place over time. Although he knows nothing about the future. But given that he is aware of the time continuum, he (intuitively) implies that it is the constant activation of the means to achieve ever new results in a new value context, which happens again and again. On the one hand, there is a constantly recurring process of the use of the means and, on the other hand, there are varying goals, the ends in time. It is also a change of goals, the ends in time that leads to changes in evaluation of the means. We must always in time re-evaluate the means in the context of new ends desired. And it is the value uncertainty about the means that is “problematic” for a man in a time continuum. With regard to the goals, the ends, a man can presume that they will be both the same and completely new, yet unrecognized. They are (intuitively) assumed by a man to occur. However, it is a choice of means in a time continuum that will ensure the achievement of varying ends in time, which is the main complication. The choice of means (sums of goods) “limits” the satisfaction of the same, varying, as well as newly set goals (ends) of action in time. A choice which is made only once (e.g. production of a bow, cultivation of a field, or building a shelter) is no longer changeable and cannot be reversed.

However, a man assigns a value to the goods not only in the context of satisfying his own needs (use value). But he also assigns a value to the goods depending on how they can meet the needs of others (exchange value). The higher the continuous evaluation of the sum of savings (the means in the sense of use value + exchange value) is in the possession of an individual, the easier it is for him to react to the future. It stems not only from the option to directly satisfy own needs, but also from the fact that, if a man owns something that someone else needs, there is higher certainty that the man will exchange the existing surplus for what he himself currently needs. Ensuring the continuous preservation of the sum of savings (a portfolio of the goods) in a state suited to meeting the needs may be perceived in a time continuum in three layers. In the sense of satisfying the needs directly (the man assigns a use value to the goods), i.e. by gradual production and consumption of the savings made and accumulated. And indirectly (we assign an exchange value to the goods). However, the indirect possibility is further divided into the exchange of part of the accumulated goods for other goods in a particular time “t” and the exchange of the accumulated goods for other goods in a time continuum “tn”. In all three cases, the man faces the problem of change/preservation of the continuous perception of the value of a given goods portfolio in the sense of satisfying his needs in a time continuum[25]. I claim that the problem of preservation/change of the human subjects’ perception of the value of the portfolio[26] in a time continuum, the men reflects through what we call “originary interest”. Originary interest is an abstraction created by mind, related to the mutual indirect satisfaction of the entities’ needs in time. It is attributed to the entities’ activity as an indirect way of meeting their needs in a time continuum. In the case of direct satisfaction of the needs, the abstraction serves as the opportunity to human mind to assess what brings the alternative in relation to the indirect opportunity to satisfy the needs[27].  

Thus, originary interest is an abstract idea of at least two men assessing the exchange in time of how the goods portfolios owned by them are and will be valued within the context of at least their two subjectively perceived time continua. Or we can say that the originary interest is a reflection of EGO in the context of alter EGO[28] when evaluating the indirect satisfaction of its needs in a time continuum. There are two important things to note at this point. We do not attribute interest to the goods! We attribute it to the activity of exchange (indirect satisfaction of needs) in time and in the context of a portfolio of the goods that is used as a whole to meet the human subjects’ needs. Assessing the use and exchange value of the goods is valuea concretised value expression of such activity. 

In the sense of Hülsmann’s quest for interest as a spread, it is a still a value spread[29] between the ends and the means of at least two humans in the exchange. The end is to satisfy potentially identical, but also new needs of the humans in time. A mean to achieve the goal (end) is a continuously created portfolio of the goods which are owned by humans and varies proportionally to the goal/end in time. On the one hand, the extent of a given spread is determined by how the humans perceive an expected newly gained use and/or exchange value of the goods (of their portfolio) in a time continuum and, on the other, it corresponds to the sum of various factors they consider relevant to how the factors influence the future evaluation of the portfolio of the goods. The extent of the spread “in the amount” therefore corresponds to the risk or gain associated with the fact that the preservation/change of their portfolio will be usable for expected direct (use value) or indirect satisfaction (exchange value) of their needs in a mutually agreed time period in which the change of the portfolio is to occur, as preparation for a subjectively determined consistent period of time[30],[31]. The extent of the spread increases with the decreasing portfolio valuation and decreases concurrently with the increasing portfolio valuation in time. Thus, the spread is lower if the human subjects presume that a particular object of exchange in time is more likely to contribute to satisfying their needs by a portfolio of goods, and vice versa, where such likelihood of satisfaction of their needs would always be expected to be higher than if the exchange did not take place.

Direct Satisfaction of Needs and Interest

Where man satisfies his needs directly, we only perceive the interest as counterfactual, i.e. in the context of assessing whether satisfying the need directly is not preferable to satisfying it directly. Direct satisfaction of needs resembles a way of meeting a need by human subject’s activity, which is also declared by Hülsmann to bear no interest. An activity for itself. As we have already mentioned, Hülsmann applies interest only to labour, because he cannot apply interest on the ends and means unless they may be distinguished from each other. i.e. in the case of singing for singing, or drawing for drawing. Is it the same thing? In our solution presented, we do not attribute interest to the action itself. We attribute it to the interaction of men – indirect satisfaction of the needs. A difference should therefore be obvious. Our perception merges into that of Hülsmann when a good is only produced in the context of one’s own pleasure, e.g. I scribble something on paper (use value). At that time, I really do not attribute interest to the activity and a good resulting therefrom – scribble. Because I draw for myself (drawing for drawing). However, the difference is that the scribble remains in my portfolio of goods and, if I can ascribe a degree of exchangeability to it, I can assign the interest spread to the activity of exchanging the scribble under new circumstances and in the newly perceived future. Attention! Interest is not attributed to the scribble per se. The interest is attributed to the way of meeting the need – the exchange in time (the scribble can be an object of the exchange) in the context of the whole portfolio of goods. If a good loses its exchangeability over time, for instance, people find out that it does not really concern a work of art positively evaluated by them, but scribble, the activity related to the exchange of the given good (scribble) then ceases to be credited with a value spread of interest. The good is becoming unexchangeable and only serves to satisfy my need. Then it will either continue to satisfy my needs in a subjective way, or become worthless.

Hülsmann would also attribute interest to some production of goods, which is labour-related action. It is not so in our concept presented. For example, if we grow corn to make bread, we do not factually use interest until we begin to think about growing corn in the context of its exchangeability. Once a man produces a good assumed by him to be satisfying only his needs in terms of value, then he produces it from the perspective of himself and will not produce it from the perspective of others. In this respect, he has no reason for thinking about potential evaluation of the good by others. The good, by definition, has to meet the man’s needs – it is demonstrated by the fact that he retains the good and does not try to exchange it. We also incorporate interest into actions that are naturally related to labour, but only in the context of its exchangeability. Not in the context of labour for oneself. A difference in contrast to Hülsmann should therefore be apparent.

Indirect Satisfaction of Needs in Direct Exchange and Interest

Since we empirically perceive interest only in the exchange during a more extended period of time, a potential critic of our concept presented could argue that human subjects do not use the concept of interest when exchanging in a particular time “t”. Interest is not explicitly incorporated into a direct exchange, but only in an exchange in time, where the direct exchange in time “t” is definitely related to the problem of changing/preserving the value of the human subject’s savings in a time continuum. Can we see an exception to the theory?

As this is an exchange, we implicitly attribute an interest spread to the valuation; it is neither production nor labour for oneself. It is therefore necessary to state that there is interest in an exchange, but it is not explicitly incorporated into the exchange, since its range is negligible in the context of some perceived common sense associated with a potential change in the perception of the portfolio’s value in time. What we exchange directly – the existing apple, here and now, is exchanged for the existing pear in the context of time when the human subjects do not expect the estimate of their portfolio evaluation to be changed in the sense of the exchange goals. The result of the exchange – satisfaction of some needs, is thus known and independent of the time when expected value changes could occur. This does not mean that the perception of originary interest does not exist in this case. There is originary interest, but its range is negligible or close to zero.

Indirect Satisfaction of Needs in Exchange in Time and Interest

Interest, however, is perceived in a more complicated form of exchange which is carried out in a longer period of time. This implies that the man with existing savings attributes an exchange value in time “t” to them in order to secure the expected higher rate of satisfaction of his future needs with a new portfolio of goods enriched by the exchange object. The exchange object will be clearing a debt by the other man with the agreed good(s) in the future. How does interest arise in such non-cash exchange?

There are always, under any circumstances, two prices on the market – an ask price and a bid price. Between a bid price and an ask price, there is a spread which is between two means of exchange. From the perspective of human subjects, the ends constitute satisfaction of the needs through the goods acquired, and not the goods themselves. Goods entering into the exchange are therefore the means of exchange and the resulting exchange price is a ratio between them, when the notion of the bid price meets that of the ask price. Such price also includes a component of interest the range of which is or is not relevant to the human subjects. The human subject either perceives it, mostly in connection with the exchange in a more extended time when one part of the exchange is divided by a period of time, or disregards it, mostly in connection with the exchange in a particular time[32]. The price of the exchange encompassing interest then results as a spread from two other spreads.

The first spread follows from the assessment of the exchange in “t” of the existing (already acquired and hoarded) P1 portfolio savings (A, B, … C goods) of the human C1 (creditor) against the alternative of the gradual direct consumption of the existing P1 savings of the X1 (dishoarding) in a time continuum (tn). The first alternative is considered in terms of acquiring a new economic good to build a diversified P1´ portfolio (A, B, … C goods+E) from another human in time t+1, which is assumed by C1 to be satisfying his expected specific needs, but also non-specific needs in “t+2”. The second alternative is considered with respect to gradual using of P1 (A, B, … C goods)[33] in his gradual dishoarding, which are used to satisfy the expected specific, but also non-specific needs in the future. The C1 considers a spread in the context of which state is expected to provide him a better level of satisfaction of his needs through what he will have in the future.

The second spread follows from the value spread when the other D2 (debtor) considers the current option to use savings which do not exist from his perspective, i.e. he is willing to use part of P1 owned by C1 to enable him to create the economic good E against the need to reduce its consumption (he has to increase hoarding of some of his savings)[34] in time. At the same time, the first alternative is considered with respect to fact that D2 will have to abandon part of the consumption or exchange of the E that it wants to produce in the future in favor of C1 against which he incurred his debt. The second alternative that can be used by him is the gradual hoarding of some X, Y, Z goods that will provide him with the planned realization of E or another non-specific good (Y), based on which he will be able to secure his economic existence in the future.

On the subjective level and in terms of the value scale, the first man decides whether he will prefer to continue with hoarding or dishoarding of the P1 and to exchange them directly for other current goods or will activate part of his P1 in time in a more complicated economic relationship, in which he exchanges some part of P1 for the promise of acquiring the E originating in the future, i.e. new E enters P1 in the future. The C1 will in principle acquire the E in the future that reduces the risk of change in the value of the portfolio of goods in the context of a use and exchange value of the goods in its new portfolio (he diversifies his assets portfolio). From a formal logical perspective, it is an assumption that if savings in the form of P1 ensure the exchange today, other savings in the form of P1´ will also be able to ensure it (P1 + the E good provided by the other man) in the future. This means that the man anticipates a formal logical assumption that something he regards as savings (surpluses of some goods) will also somehow constitute exchangeable savings in the future in respect of his unspecified needs, anticipating that he will have some future needs. From the subjective perspective of the other one D2 and in terms of his preference scale, the D2 decides whether he will start making more savings today or be able to immediately use someone else’s C1 savings provided that he will have to increase his level of savings of the E good, the surpluses of which he will gradually give to the first man to clear the recognized debt.

The motivation of both to enter into the exchange in time is not only linked to the assessment of advantages or disadvantages of such exchange in terms of how they benefit therefrom, but also to potential changes in the value of goods portfolios in time, arising from changed needs. Because the man with existing savings faces the risk that his savings will cease to be capable of meeting his needs in the future, whether directly or indirectly. For some goods, it is more obvious than for others; the owner of the apples faces objectively a higher level of risk of direct and indirect satisfaction of the needs with apples in time than the owner of the iron, since apples spoil more quickly. Not even the owner of the iron can be certain of value stability of such commodity in a time continuum, not only because of the objective properties of the iron, such as its oxidation, but also due to a change in terms of future supply of iron and demand for it. A similar problem is confronting the other man, but the difference is that he also faces a decision as to which commodity to hoard (make its savings) so that he will be able to acquire other capital goods for its economic project, the current implementation of which he has to postpone in any event because he has insufficient savings.  

It might seem that when determining the price of exchange in time, it is a matter of increasing a price of direct exchange by a component of interest in relation to time. In this work, we look at the problem in reverse. Every exchange contains a component of interest. But in some cases primarily associated with a short time span,[35] it is negligible and thus not perceived. The component of interest should therefore be related to the subjectively determined time continuum that involves the perception of potential portfolio value changes associated with potential changes in meeting the human subjects’ needs in time to be ensured by the portfolio.

In this case, our view may appear to veer in the description of the fact that interest could be a spread between current and future means of action aimed at satisfying the needs (the ends). Thus we would deal with the problem of having to know what the ends represent in the unknown future. This means that we would need to define the spread as an assessment of something real against something we know nothing about and the value of which can change x-times in time. It should be said that the lines of argumentation herein also compare the present with the future. In the case of an exchange in time, the time factor cannot be avoided. However, given that we provide arguments in respect of a goods portfolio, they are not inconsistent in terms of time. This is because the result of the exchange is a changed ratio between the amounts of savings (means) for both human subjects. This implies that the first man assumes that he will have some new savings in the form of P1´ – old savings (wealth) and (income) in the form of new savings from the other man (economic good E) in time “t+n” to ensure a lower level of risk associated with maintaining the satisfaction of his needs in time, or a profit-driven potential increase in satisfying his future needs. The other man perceives that relationship inversely. The result of the exchange thus enables the interconnection between the current and the future. Both at present and in potential future, it concerns a ratio of the composition of some savings or human subject’s goods. It is therefore a mathematical expression of a formal logical nature, thus being time-comparable.

Value and Time Projections of the Future and Spread Extent

Given that interest is a value spread, its extent depends on the various types of assessments and human subject’s conceptions of economic reality. This means that the human subjects evaluate the likelihood of the expected result of the exchange (some new portfolio of goods), i.e. they assess the likelihood of change in satisfying their needs through the sum of goods (wealth) in time. Therefore, they apply a value and time projection of the future, i.e. a value assumption about factors which the expected result of the credit exchange depends on. The value and time projection then determines the extent of interest spread.

Introducing the concept of value and time projections of the future that affect the amount of interest will help us to terminologically differentiate from Mises who explains the theory through time preferences (means: “I prefer sooner achievement of the goal to its later achievement”). The explanation through time preferences appears to be “intuitive”. Time preference influences the rate of interest (within the barter it is more suitable to call it robustness of interest represented in some economic good/s), there is no doubt. But time preferences do not cause interest. Interest is a separate phenomenon. Time preferences affect the rate of individual’s savings. These are the savings that can be exchanged. The human that evaluates, based on the interest rate, changes/preservation of satisfaction of his needs with goods in time decides whether to enter into exchange in a wider time continuum, depending on several variables ever-evolving with time – attractive interest is compared with the time of the exchange realization, but also with collateral, social and legal terms of exchange, or the competitive potential of other exchanges in relation to whether he will only hoard the goods by its own activity. Thus, the rate of interest is indirectly influenced by time preference, but there are also other factors affecting it. Hülsmann also comes to a similar statement in other work[36], where he argues that (bold is the original italics):

There is no systematic relationship between the (pure) interest rate and the volume of aggregate investment. Any observed empirical relationship between the interest rate on the one hand, and savings-investment on the other hand, must therefore be interpreted as a contingent relationship, at least from the point of view of the theory of capital.”

Value and time projections of the future therefore reflect the problem of determining the interest rate spread in a more comprehensive way compare to usual time preference terminology. A value and time projection of the future can be made by the man because he can reflect its own EGO in a time continuum and can fulfil similar expectations of Alter EGO. A value and time projection is a concept that is obviously not accurate. A man knows nothing about the future. Any idea of the future is an incorrect idea, but it may not be unsatisfactory for the man[37]. The man can fulfil it based on the reflection of other experience (empirical knowledge) and based on the idea of stability/instability of reality and society developments, i.e. activities of other men in the context of technological progress, stability/instability of preferences, cultural, national and other variables. Similarly, each man behaves in a different way under certain circumstances, because he perceives such circumstances individually. Another factor is, for example, the rate of his individual savings which affects whether he will enter into the exchange in time with a higher or lower level of risk. Someone who has high savings may behave differently from the one with lower savings. Each individual can perceive the risk associated with the future in a different way, and the young, the elderly, prisoners, mothers, children, adults can otherwise approach the projection of their future.

Value and time projections, which increase the assumption that new composition of the portfolio of goods is likely to provide a higher level of satisfaction of the man’s needs (with the amount of interest relatively decreasing), cause a higher rate of exchanges in time (indirect satisfactions of needs in time) , and vice versa, value and time projections of the future, which decrease the assumption that new composition of the portfolio of goods is associated with a lower level of satisfaction of the needs in the future (with the amount of interest relatively increasing), cause its reduction.[38].  Various types of social activities must also have a different impact on a change in value and time projections of the future. If society experiences a lower rate of mistakes made in business associated with a voluntary exchange, a lower rate of theft and murders, wars or natural disasters, or a lower degree of impact of political (regulatory and tax) activities, the value and time projections of the future will be more stable, and vice versa. It is necessary to realize that a higher rate of savings (capital goods) in society does not ensure low/er interest. Society can have a huge amount of accumulated savings and the interest rate can be high anyway in respect of an assumption about the future made by the human subjects (threat of war, natural disaster, or the fact that the project financed by credit exchange is regarded as unrealistic or not ensuring its exchangeability). Equally a lower rate of savings does not cause high interest. Society does not need to have extensive savings and interest can decrease in respect of the more positive projections associated with the future.

Monetary Depiction of Interest and Calculation in Time

In respect of transition to a monetary depiction of interest (cardinal scales), it is necessary to have money which enables a cardinal depiction of interest[39]. While so far we have explained interest in the context of the problem of preservation / change of both use and exchange value of the goods in two men’ portfolio in time, then the cardinal depiction of the amount of interest in the medium of exchange is caused by the fact that the use value of the goods by which D2 (before money) seeks to clear its debt must gradually cease to exist. The assessment of the exchange value of the goods clearing the debt is becoming more and more dominant, specifically more exchanges is made with the particular good which starts to be considered as the unit of account and step by step as money. This indicates that in a non-monetary exchange, human subjects have considered interest in terms of preserving the use value of goods in their portfolio, for instance, a debt in “t+1” was cleared by a fresh apple, which fulfilled a use value of meeting a direct need in t+2, while in a monetary exchange, it is consistent exchangeability of the goods that are subject to agreement from D2 perspective at the time of fulfilment of the exchange conditions, i.e. it depends on whether D2 is able to further exchange the object of the economic project for a money / medium of exchange during the time of the existence of his liability.

As we have already shown, interest is a phenomenon that can only be perceived in terms of exchange. If a medium of exchange is used, interest must be included in the exchange price expressed in the unit of measurement of the medium of exchange. In a more and more evolving economic community, it is natural that human subjects increasingly rely on indirect satisfaction of their needs. The higher the level of liquidity of their savings is, the wider range of their various needs they can satisfy. And since they use a medium of exchange for mediating the exchange, then a requirement for a higher degree of liquidity of savings passes onto the good mediating the exchange indirectly – a medium of exchange M. Human subjects continue to demand diversity of their wealth portfolio (the sum of goods), which enables greater likelihood of their exchangeability in time, which is, however, also mediated by the liquidity of the exchange medium M in time, representing such diversity. Interest thus inevitably becomes a monetary phenomenon. The value spread will be expressed in the exchange medium, which also enables both its calculation and explicit depiction; human subjects can therefore compare the price of a direct and indirect exchange, perceiving the difference as an interest differential. 

The use of the M enables valuation of the exchange in which, from the creditor’s perspective, interest reflects whether the borrower is able to secure the monetisation of new goods in the future and, from the borrower’s perspective, whether he will commit himself to clear a debt resulting from the use of the M for the purchase of current capital goods, which are purchased to ensure that the human subject is able to provide new goods or services in any sort of time-defined future that will clear the debt in M to which he made his commitment at present. In the very same manner, the currently purchased (capital) goods that enter into the economic process were thus created at some time in the past. They are currently exchanged and appraised in the context of today’s new value judgements by human subjects, depending on how the goods are to meet the needs of agents in the future. Entities will thus find out whether their past production was of any use. If so, it means that (capital/consumption) goods can be monetised and generate income in the form of M. If not, it means they cannot be monetised, the entities account for the loss expressed in M and apply a value discount to them and the related exchange.

Both entities have also the option to further hoard the M, and the entity having the title to the M has also the option of its gradual dishoarding. However, if the entities enter into a credit exchange, they demonstrate that the hoarding of the M is, in the context of their future, a less favourable alternative. Because both entities also face the problem of the purchasing power of the M hoarded. The creditor, since he is not sure whether his “only” hoarded M will have the same purchasing power in the future and the borrower due to the same, except that he does not know what amount of the hoarded M would be needed to ensure implementation of his project in the future only by hoarding itself. He does not know the purchasing power of the M, and today he is offered the creditor’s capital in the form of M. The value judgements by the entities change in time, and it is not clear what prices of (capital) goods necessary for his project will be set in the future, i.e. he does not know how many units of the hoarded M he will need.

The problem confronting us in explaining the exchange in time is the valuation of the exchange in a time continuum. It is a problem in view of the fact that the goods as well as the M itself can be subject to value changes in “t+n” in relation to time “t”. Similarly, it is necessary to make an assumption about changes in the value of the M, thus in our explanation, we are confronted with two-time events that are not interconnectable in terms of value. The problem we deal with in our explanation is how it is possible to compare in time the value determination of the goods expressed in the unit of M, i.e. how an economic calculation can be made in M without assuming, like Fekete or Mises, some objective properties of exchangeability, i.e. objective liquidity of the M good. In respect of price and the component of interest, as well as the interconnection between the two time and mutually different time spans in terms of value, the following passage from Hülsmann’s Theory of Interest can be instructive again for us:

“A 10-percent interest rate obtained by making steel product X, for example, does not mean that 110 ounces of gold obtained through the future sale of X are inherently more valuable than the 100 ounces paid now for the corresponding factors of production. And neither does it mean that all current investments yield in fact a 10-percent return. What it means is that there are here and now no men ready to invest 100 ounces into the production of X unless the yield is at least 110 ounces.” 

The creditor enters into the exchange only if he gains 110 ounces in the future. 10 ounces representing 10% interest is a valuation of the assumption about the borrower’s ability to produce the X good; in addition to the risk associated with the production of X, the economic context in which the exchange is made is also evaluated thereby, including the assumption about a potential value change of the generated X, which the borrower must exchange in the future for 110 ounces (principal + interest) plus its profit margin. Interest thus reflects human subjects’ value and time projections of their economic activity in a time continuum (the future). What is important is that it is the existence of interest[40] on the basis of which the entities decide in reality in terms of implementation or non-implementation of economic projects, i.e. what appears economically meaningful or meaningless to them.

It is thus the interest using which we are bridging the value difference between two time periods which is expressed in the M. In this regard, we need to realize that the application of interest does not mean that interest is used to accurately discount or determine the value of the goods[41]. Interest represents the human subjects’ view of what is economically possible. The time periods can be interconnected because, in time, the entities contrast current costs/revenues related to their savings with unequal or any other particular savings in the future, but with the same principle of the use of interest in the valuation of the goods in time. If we imagine as a thought experiment that the interest rate is reflected in society at the level of, for example, 10% and its amount will not change between time “t” and “t+n”, we deal with a similar process of determining the price of exchange of any goods in M in a time continuum, which is determined by human subjects’ idea of what appears and does not appear economically meaningful. On the one hand, the human subjects reflect 10% interest associated with the X, Y, Z goods exchangeability in time in respect of their portfolios, and on the other hand, they express such value reflection of 10% interest by the medium of exchange M, mediating the exchange. Thus, the prices of the X, Y, Z goods expressed in M as being both in time “t” and in time “t+n” correspond to the human subjects’ ideas of the value of the X, Y, Z goods as well as those of the medium of exchange M. Profit or loss expressed in M can then be calculated.

Of course, interest is changing in reality; it is a value spread. The human subjects therefore change the extent of such spread in time in relation to their views of what is possible in a continuous economic process. However, the assumption of a change in the extent of such spread does not alter the nature of the way of comparing two time periods; it only alters the input variables which are, however, associated with real changes in the perception of an indirect way of satisfying the human subjects’ needs – a narrower spread means a higher degree of the use of an indirect way of satisfying the human subjects’ needs, and vice versa. If the medium of exchange M correctly reflects interest changes[42], then the set prices of goods in M must be optimal and therefore comparable in time. The human subjects can compare the revenues and costs associated with economic activity in time, and subsequently evaluate which of the economic processes was more meaningful from their perspective. Of course, the foregoing applies provided that M optimally (i.e. as well as possible) reflects their value assumptions about the amount of interest. Therefore, in the case of correct reflection of interest, any alterations to the prices of the X, Y, Z goods expressed in M in a time continuum represent only the changes in the value of the X´, Y´, Z´ as goods in time caused by the subjective altering of the assessment of their use value[43].

Inability to Arbitrage Interest Away

Another issue that needs to be resolved in our understanding of the concept of interest is the question of why interest in economic relations is not arbitraged away (to zero) through a business activity. Hülsmann argues that such state is caused by the so-called “originary interest”. To explain why the spread cannot be removed in terms of the theory presented herein, we can begin to argue with a thought experiment on the “Garden of Eden”. In the Garden of Eden, everyone should have everything and all at once, and there would be no shortage of anything. In that case, it would not really make sense to temporarily bridge a mismatch between savings and consumption; in the Garden of Eden, there would otherwise be no reason for any exchange. However, the exchange could exist as a thought experiment (game) when a shortage could be simulated. This implies that the very essence of the intersubjective phenomenon of interest or exchange is primarily dependent on agents; the surrounding reality and its rarity is only a sufficient condition for exchange. This examples also shows that both interest and exchange are intersubjective concepts. If an agent would be alone in the Garden of Eden, he would not have anybody to play the shortage “games” with.

But we do not live in the Garden of Eden. A man, by definition, makes various projections of his future. He has a mortal body, is aware of himself in a time continuum and perceives the limitations of reality. This implies that from his perspective, there is always a potential for time mismatch in the exchange of savings for savings that are still being made, i.e. the use of indirect satisfaction of his needs. In other words, interest cannot be arbitraged away by a business activity, because there are always some needs in a time continuum that are not satisfied and can be valued, and the business activity itself constitutes indirect satisfaction of the human subjects’ needs, ergo, it will include interest.

In terms of our explanation of interest, it should also be kept in mind that defining interest in the cardinal depiction in the unit of measurement of the medium of exchange M at the level of 0 does not mean that interest is removed from social relations. Contrary to Fekete statements about zero interest rate, it simply means that the assumptions about alterations to the values of the changed goods are irrelevant from a subjective point of view, or more specifically, there is no reason to perceive them in such a short period of time.

Negative Interest

The final issue to be dealt with in this work is the problem of negative interest. On an ordinal scale, it makes no sense to use the concepts “positive” and “negative” in explaining interest as a value spread in barter exchange in time; on an ordinal scale, we can only use the “more preferred or less preferred to other state”, i.e. we can show neither a zero value by definition, nor a negative value (in minus) terms; it only appears on a cardinal (monetary) scale.

When dealing with negative interest, we can distinguish ourselves from Hülsmann only in part. As it can be seen, interest must always exist according to Hülsmann given the existence of the so-called originary interest, which sometimes causes a negative and sometimes positive monetary appraising of the interest rate,[44] specifically in view of the fact that the meaningfulness of the exchange in time need not be inevitably expressed by a higher number of units of measurement of the exchange, i.e. instead of the exchange of 100 ounces of gold (or pears) for 110 ounces (apples[45]), there will be, e.g. in a year’s time, the exchange ex ante agreed so that 100 ounces of gold (or pears) today will be exchanged for 90 ounces (apples) in the future. Hülsmann gives charity or donation as an example of an exchange with negative interest. Negative interest must therefore be distinguished from the exchange, the result of which bears negative interest cardinally expressed in M. In the context of negative interest, it must also be pointed out, in agreement with Hülsmann, that the ex post assessment of a credit exchange in the context of negative interest represents another value relationship.

Negative cardinal interest in our theory presented implies a high degree of exchangeability of the good in the future. High positive interest implies the opposite – a very low degree of exchangeability[46]. As we have already mentioned several times, interest is a spread derived from the total portfolio of goods used by the human subjects to prepare for their future in the context of liquidity of such portfolio. Therefore, it is not impossible that some goods may have negative interest because the human subjects expect a significant increase in the liquidity of the entire portfolio. However, this is linked to the question of why, in the case of negative interest, creditors do not prefer hoarding of the medium of exchange in which interest is expressed and which does not itself bear interest (it is nobody’s IOU), and why they still assign negative interest to the exchange of goods[47] that are someone’s IOUs. Entity’s entry into a credit relationship with negative interest implies that a value spread, in terms of an ordinary scale, leads to a state in which the creditor regards the entry into exchange as the more preferred state. Thus, non-entry into exchange would be worse in some respects, implying some kind of alternative costs or alternative returns associated with that exchange, as the case may be. It also implies that the human subject then prefers a negative interest rate e.g. in M, because hoarding of the medium of exchange has higher alternative costs or hidden profits, as the case may be. It is therefore a less preferred status in terms of the value of the whole portfolio. This is also applicable to a barter exchange of goods the storage of which causes higher alternative costs; e.g. due to the impossibility of storing them or their too short shelf-life[48].

However, our introduced system enables us to consider absence of a given spread; as we have already shown, Hülsmann must always consider it because he is looking for interest in action. Specifically, there will be no interest in some situations. The first possible situation is associated with the lack of mental equipment of our antecedents (the interest was born on the background of their spontaneous activities in exchange in time within the community; however, they do not realize it explicitly). The second situation constitutes a case when only one last person would stay alive in the world. The third option is that it can only exist in its potential form, because it may not have been perceived by human subjects in some historical time span. It is also true that this spread will not have, for example, its cardinal depiction in reality if it is extremely high or low. The extent of a value spread will cause human subjects to reflect the value spread on their value scale, but, for instance, in the case of its extreme monetary amount, the risk arising from a potential exchange is too high and the exchange does not occur, resulting in non-depiction of the spread. And vice versa, e.g. in the case of a direct exchange, it is so negligible that it will not be expressed.


We have shown that the traditional understanding of an interest rate derived from time preference is not correct. In connection with the last of prof. Hülsmann’s work, it has also been proved that by perceiving interest as an intersubjective value concept, it is possible to explain several critical remarks about his work as well as to avoid some inconsistent assertions in his work. We have demonstrated that interest arises as a value spread between the value spreads of at least two humans in the context of securing exchangeability (liquidity) of the portfolio of goods used to achieve the human subjects’ goals in a time continuum. The first part of the spread consists of a comparison of two alternative states of the owner of the capital goods, i.e. that he will continue to hoard (accumulate) its goods (portfolio) in order to prepare for an uncertain future against the alternative that he exchanges a part of the portfolio of goods today in return for that the other party of the exchange will provide him later in time with a flow of the goods produced by the other one, which he will then include in the portfolio. The other party to the exchange is in a similar, but different situation in terms of time. The amount of interest is influenced by human subjects’ value and time projections of the future and other factors related to the exchange in time; time preference, social and legal contexts, competition of exchanges offered in time. Interest is a separately perceived value phenomenon neither is derived from time preferences nor the money.

The presented concept of interest can be used in a time continuum given that it is a mathematical expression of a ratio of marginal unit of the good put into the portfolio of the man. It means that it is a mathematical concept identical in time and so far, value-invariant. Subsequently, interest is used by human subjects as a basis for making economic calculation in time. Two distinct and value-different time periods can be assessed in view of the same principle of applying the value perception of an indirect way of satisfying the human subjects’ needs.

Matúš Pošvanc, Slovak version of the article was published on 28 May 2018

[1] Latham, K.: Dr. Hülsmann and the Pure Time Preference Theory of Interest. Page 8. WWW DOCUMENT <>

[2] If this is the case, then Mises’s theory is confusing. As if he also used arguments of Bohm-Bawerk, Fetter and Fisher, who perceive time preference as preference for unchanged goods in two periods of time, including those of Hülsmann in perception of such goods. That is because the citation which Hülsmann refers to “The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant.” is preceded by the following sentence: “No mode of action can be thought of in which satisfaction within a nearer period of the future is not–other things being equal–preferred to that in a later period.“ Other things being equal means this is the assumption that nothing changes over time. See Hülsmann, J.G. A Theory of Interest. WWW DOCUMENT <> 

[3] But according to Hülsmann, this is not the a priori feature of action, which Hülsmann demonstrates on the problem of the martyr or the suicide. However, as Hülsmann’s critics (Guning and Latham) points out, Hülsmann misinterprets Mises. Mises does not relate time preference to consumption, but to a characteristic feature of action – the preference of assessing the present to the future. Relating time preference to consumption is misinterpreted by Hülsmann, resulting in a wrong conclusion that the martyr and the suicide do not use time preference. However, it is irrelevant in the context of the main argument used by Hülsmann that interest is a value spread. 

[4] For example, see Guning, J.P. Interest: In defence of Mises. or Latham, K. Dr. Hülsmann and the Pure Time Preference Theory of Interest

[5] Guning, J.P. Interest: In defence of Mises. or Latham, K. Dr. Hülsmann and the Pure Time Preference Theory of Interest page 4, or the entire part from page 3 to 7.

[6] cf. Pošvanc, M. Theory of Intersubjective Perception of Value of Money. WWW DOCUMENT <>

[7] See Pošvanc, M.: Theory of Intersubjective Perception of Value of Money. and Critique of Regression Theorem. Gold and Silver – Optimal Money. WWW DOCUMENT <>

[8] Equilibrium. Mises Wiki. WWW DOCUMENT <>

[9] Hülsmann, J.G.. A Theory of Interest. WWW DOCUMENT <> 

[10] Braun, E. The Rationale of Originary Interest. WWW DOCUMENT <>

[11] The thin ice being trodden by Hülsmann (based on the use of Mises’s theory) in this case is not something the Austrian School members do not realise; for example, see Rothbard Man, Economy, and State. Appendix B: On Means and Ends.: “The critics of praxeology confuse the necessary and eternal separation of ends and means as categories with their frequent coincidence in a particular concrete resource or course of action.” I do not regard Rothbard’s note as a problem. The problem is that Hülsmann makes an exception in describing action he should not make.

[12] See also criticism by Latham, K. Dr. Hülsmann and the Pure Time Preference Theory of Interest. Pages 14-21.

[13] I began to read Fekete thanks to his description of gold and the problem of backwardness concerning gold, not because of his concept of interest. Fekete then attracted my attention with his criticism of Mises and criticism of Mises’s time preference. It has to be said that he wrote his critique after Hülsmann, he might have been inspired by him.

[14] See in more detail Fekete, A.: Money and Credit. Collection of works. WWW DOCUMENT <>

[15] See Pošvanc, M. Theory of Intersubjective Perception of Value of Money. WWW DOCUMENT <>

[16] It is important to note that Fekete argues that gold is also subject to the phenomenon of decreasing of marginal utility, but claims that it is so negligible that gold can be regarded as an objective exchange medium in the context of common sense.

[17] cf. Mises, L. Human Action. Chapter 8.: :Individual man is born into a socially organized environment. In this sense alone we may accept the saying that society is–logically or historically–antecedent to the individual. In every other sense this dictum is either empty or nonsensical. The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort.“ I perceive the citation above as one of the differences in the approach of praxeology and monistic reflexionism to a man. Mises realises that a community preceded a man. However, his methodological approach does not use this knowledge and does not incorporate it into his premises.

[18] See, for example, PAVLÍK, Ján. Austrian Economics and the Problems of Apriorism. E-Logos – Electronic Journal for Philosophy [online], 2006, volume 13, pages 1–73. ISSN 1211-0442. URL:

[19] The influence of other human subjects on the human subject’s decision-making is implied by Misesians. However, the approach itself is not their “modus operandi”. Modus operandi is the point of view of an individual and his actions; cf., for example, Boettke, Lavoie, Storr.: The Subjectivist Methodology of Austrian Economics and Dewey’s Theory of Inquiry. (2001): “The subjective side of this dichotomy is just as misleading. Human action is not subjective in the sense of arbitrary, or private. The “subjective preferences of individuals” sounds like something inaccessible, buried within the skulls of separate atomistic agents. It sounds like it requires a focus on the individual mind, as if it points us to the method of introspection But what they are getting at when we refer to the subjective point of view of the agent is really the meaning things in the world have to him, which involves us not in the private, inaccessible world of an individual mind, but rather in the public, social world of language.”

[20] Monism of Hayek-Pavlík theory then clearly shows (and it must be admitted in advance) that the arguments already provided in interpretation and other implications will sometimes reach again the stage when it will be necessary to overcome the level of explanation of the problem in order to approach other processes and a scientific description of newly created concepts.

[21] I provided identical arguments in explaining the concept of ownership, where I tried to prove that property is a priori correlation of human thinking resulting from the reflection of a practical activity of our prehistoric (yet completely unaware) antecedents. Consequently, a man gains an insight into the concept of ownership which can take different forms in different communities. However, it is then an inevitable modus operandi of human action; see Pošvanc. M. (2009). Ownership as an inherent part of social relations. WWW DOCUMENT <> 

[22] See, for example, Herbener, J. M. Time Preference Theory of Interest and Its Enemies. Lecture. Video channel: Misesmedia, WWW DOCUMENT <>

[23] Although the fact is that, for instance, in sleep the level of our self-awareness changes. But from a temporal point of view, he also perceives himself through the changing states of self-awareness.

[24] In this work, we assume that accumulation is also explicable from a historical point of view as an intuitive activity of a man. The prehistoric communities in which EGO of our antecedents was only vaguely defined could have carried out the accumulation activity in an intuitive way. We can see the same attribute in the case of other animal species, too. As subsequently the human EGO evolved, the concept of accumulation was approached and applied to primitive social organisations.

[25] In respect of the portfolio of owned goods, it is not necessary for the human subject to perceive the actual use or exchange value of a particular good. A use or exchange value is assigned to the goods upon the human subject’s decision, according to which the human subject opts to satisfy his needs towards the future – directly or indirectly.

[26] A portfolio of goods is a time-invariant abstraction of mind. It is the sum of means to satisfy the human subjects’ needs in time. In a time continuum, phenomena can only be explained by time-invariant variables, i.e. by something that remains objectively the same in time. A portfolio as a mathematical construct fulfils the condition.  

[27] Counterfactual perception of interest is derived perception in the context that when the human decides to satisfy his needs through the portfolio of goods, he chooses between direct and indirect satisfaction of his needs.

[28] Philosophical Dictionary. Alter EGO: “A mode of alien being as the first level of what is alien to transcendental ego”. WWW DOCUMENT <>

[29] Given that we are still at the level of barter exchange, it is a thought-based value spread. It is not possible to express and depict it directly because it is a spread between two more preferable states of mutual indirect satisfaction of needs from the perspective of two men who also consider an alternative option to directly satisfy the needs. We can become well aware of the issue if we imagine the exchange as an exchange of, for example, 1 pear today for 1 apple in a month. In this respect, there is no cardinal depiction of the spread. Hülsmann also proceeds similarly when he endeavours to find the answer to why Smith and Jones prefer the apple and tomato owned by them inversely. Hülsmann talks about the cause of originary interest, although he misinterprets the means and the ends of exchange (the apple and the tomato are the means, not the ends, which is pointed out by Latham). In our case, the perception of originary interest is the cause of exchange, where we, however, derive originary interest in the context of a portfolio of goods, not from the goods per se. See in Hülsmann, J.G.. A Theory of Interest. pages 91-92. WWW DOCUMENT <>

[30] This is also implied by Hülsmann who claims that the 10% interest associated with a loan for the production of an iron commodity X only reflects that here and now there are no people willing to invest in the production of the iron commodity X unless a return on that investment reaches at least 10%. In other words, the 10% interest reflects all the factors, risks, and some profit rate associated with the future exchangeability of the X commodity.

[31] Cf., for example, Hayek’s explanation of the amount of interest rate and the level of capital productivity, where Hayek demonstrates the necessary requirement for capital productivity growth in more time-intensive productions, expressed by the amount of the interest rate. See Hayek, F.A.: The Pure Theory of Capital. Chapter VII. Compound interest and the instataneous rate of interest, pages 170-178. WWW DOCUMENT <> 

[32] Given that we are still moving at the level of barter exchange, interest is still not visible. If, in a direct exchange, 1 apple is exchanged for 1 pear today and, in a similar exchange but in time, we could see an exchange of 1 apple today for 2 pears in a month, it is not true that interest is 1 pear corresponding to one-month waiting.

[33] In this case, it is necessary to anticipate a gradual change in the value of A, B, … X goods, which may remain physically the same or similar in time, but their value assessment changes due to varying economic circumstances.

[34] From the perspective of this man, it is also necessary to anticipate the gradual change in the value of the hoarded savings.

[35] In order to understand the process, it is necessary to realise that every exchange takes place in time. It is only up to the human subjects how they subjectively perceive the given time perspective. This implies that someone will deem a week, another day and, in the case of today’s robot trading, a shorter time span to be the absolute presence with a negligible interest component.


[37] This is also evidenced by the fact that the human subjects are hoarders. They accumulate savings (hoard the goods) they are putting aside for the future, which implies that there must be some idea of their use in the future, the basic feature of which must be a value assumption about such goods which is similar to the one existing at present.

[38] For example, this is also suggested by Rothbard, although in the context of Misesian perception of interest. In the chapter “Progressing Economy and the Pure Rate of Interest” of his Man, Economy and State, he writes as follows (the original text is in italic type): “We are not concluding, therefore, that an increase in the quantity or value of capital goods lowers the pure rate of interest because interest is the “price of capital” (or for any other reason). On the contrary, we are asserting precisely the reverse: namely, that a lower pure rate of interest increase the quantity and value of capital goods available.”

[39] Describing the emergence of money is not a topic of this paper. The arguments focused on the emergence of money and gaining its purchasing power were provided, for example, by Mises with a description and application of his concept of regression monetary theorem, which I have criticised and subsequently modified in the context of the theory of interest presented herein (both concepts are closely interconnected).

[40] The capital structure is also inevitably influenced by other factors related to a debt exchange – time preference (the creditor – the owner of the savings prefers earlier exchange to later exchange, and the borrower’s preference is quite the opposite), exchange conditions (collateral, legal framework for debt recovery), a social and economic environment (changes in legislation and the rate of regulation of economic activities) and, of course, competition for the opportunity to use the capital.

[41] More specifically, it concerns the intersubjectively perceived discounted evaluation of the exchange value of the good expressed in M. This indicates that, in the case of an exchange between two humans, it is about how they mutually perceive potential exchangeability of the D2 produced good in “tn”, which can be produced upon the provision of the C1 capital in “t”. Only further institutionalisation of the discovery of the interest rate amount then enables setting the market interest rate that can be used for discounting the exchange value of the goods in general. 

[42] It is then the business discovery of the amount, extent and number of exchanges in time and the related interest rate, which is carried out by the human subjects through the medium of exchange M. And what good (fur, gold, salt, rei-stone) a particular community chooses to be M will depend on how the economic community perceives the suitability of using such good to mediate the exchange as such. This indicates that the good chosen by the community to be M must correspond to the human subjects’ ideas of an optimal response to the interest rate and allow the human subjects to mediate the optimal number and extent of exchanges of capital goods in time. The problem is solved in the related work. See in Pošvanc, M. Theory of Intersubjective Perception of Value of Money. or Evolutionary Possibilities of Economic Calculation and Money. The problem of the impossibility of socialism.

[43] The X, Y, Z goods necessarily change over time to the X´, Y´, Z´ goods, regardless of the fact that they will potentially remain identical in physical terms; what is actually changing is the attribution of their value in respect of potential changes in the human subjects’ needs.

[44] Hülsmann, J.G.. A Theory of Interest. page 98. WWW DOCUMENT <> 

[45] I use the example of apples to illustrate the fact that 110 ounces in the future are a different kind of good. By way of this example, the reader can see the difference in contrast to argumentation by time preference.

[46] Someone might imply that it is precisely the high interest attributed that causes the man to carry out an activity for himself, which we designated as exclusive of interest. It is necessary to realise that there is a difference between economic good that is not exchangeable and which is not exchanged. The good that is not exchangeable is the good which other community members do not want and the owner implies for whatever reason that they should or could want it. The good which is not exchanged is the good which a man does not intend to exchange for whatever reason.

[47] Recent negative interest on some government and corporate bonds (in 2016) may serve as an example. Of course, such situation was also considerably caused by various kinds of political activities which, on the one hand, artificially reduces a nominal interest rate and, on the other hand, politically, regulatively and by virtue of power, try to convince the investors that whatever happens, their investments will have a certain degree of liquidity. Mario Draghi’s “Whatever it takes”. You Tube. WWW DOCUMENT <>

[48] cf. Potužák, P. CAN THE NATURAL RATE OF INTEREST BE ZERO? A NEOCLASSICAL APPROACH. In this work, Potužák presents the possibility of a negative interest rate in economy, whether without or with investment opportunities. It analyses the possibilities of negative interest for some humans in the context that, given the lower potential earnings from wealth (savings) in the future, human subjects may prefer a negative interest rate, i.e. they will receive less than the amount of principal itself in the future. He gives an example of spoilage or loss of value of goods in the future – e.g. apples which are to be future income go mouldy. But here, it is necessary to imply that although the cardinal depiction of interest would be negative, the value status is more preferable, where its cardinal positive depiction should be realised on another market – naturally, only if it can be depicted at all; we must admit that we cannot depict some positive cardinal values because they are realised only in the context of a more preferred value spread. The second problem I see as problematic in Potužák’s presentation lies in some unrealistic premises which he relies on (e.g. island economy, a described principle of reallocation of goods, etc.).

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