Endogenous Time Preference and Optimal Capital Deepening: A Rational Reconstruction of F. A. Hayek's Capital Theory

This paper studies the growth and fiscal policy implications of the assumption that public policy generates an externality in the individual rate of time preference through the aggregate public capital stock. We examine the competitive equilibrium properties and we solve for endogenous growth–maximizing fiscal policy. We investigate the behavior of the government size and the growth rate to the sensitivity of time preference to public capital and the magnitude of public capital externality on production. We find that the Barro taxation rule [Barro, Robert J., Journal of Political Economy 98 (1990), 103–125], which states that the elasticity of public capital in the production function should equal the government size, is suboptimal. We show that the government does not necessarily have to increase income taxation following a rise in public capital intensity because of the externality of public capital on time preference and, in turn, on growth and the tax base of the economy.

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Inflation Stabilisation with Durable Goods and Endogenous Time Preference*

Economic Record ◽

10.1111/j.1475-4932.2009.00610.x ◽

2010 ◽

Vol 86 (274) ◽

pp. 342-351

Author(s):

ARMAN MANSOORIAN ◽

MOHAMMED MOHSIN

Keyword(s):

Durable Goods ◽

Time Preference ◽

Endogenous Time Preference

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A Praxeological Theory of Interest Rates

MISES Interdisciplinary Journal of Philosophy Law and Economics ◽

10.30800/mises.2021.v9.1431 ◽

2021 ◽

Vol 9 ◽

Author(s):

Hendrik Hagedorn

Keyword(s):

Interest Rates ◽

Cost Reduction ◽

Time Preference ◽

Fixed Capital ◽

Production Costs ◽

Marginal Rate ◽

Capital Theory ◽

Preference Theory ◽

Marginal Rate Of Substitution ◽

The Interest Rate

This paper starts with the observation that the pure time preference theory leads to conflicting views concerning the effect of changes in productivity on the rate of interest. Subsequently, it reviews parts of the interest literature and concludes that the pure time preference theory does not qualify as a praxeological theory. Then, the paper combines Hülsmann’s theory of interest with the subjectivist capital theory of Lachmann and Kirzner and provides a praxeological theory that explains the rate of interest. The key to that theory is that cost reduction through the use of fixed capital must always be understood as relative to the costs of labor which the capital replaces. Since labor is non-specific and the price of labor therefore also constitutes the production costs of fixed-capital goods to a certain extent, the use of fixed capital necessarily entails a business surplus somewhere in the economic system. Since this surplus cannot dis-appear it qualifies as interest income. The size of this income is such that the interest rate corresponds to the marginal rate of substitution between labor and fixed capital as embodied in entrepreneurial actions.

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