Chapter 12: The pure time preference theory of interest
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Economists of all schools recognize the tremendous contributions of Eugen von Böhm-Bawerk to capital & interest theory. After critiquing virtually all previous discussion on the topic, Böhm-Bawerk offered his own "agio theory" which was the forerunner of both Irving Fisher's (standard neoclassical) approach and of the standard Austrian approach, namely the pure time preference theory of interest. The pure time preference theory claims that the higher subjective valuation of present versus future goods is the source of interest, rather than the "marginal product of capital." This essay traces the development of the pure time preference theory, contrasts it with the neoclassical framework for interest, and summarizes recent attempts to improve or even replace the pure time preference theory.

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