Lesson 4 of 7
Why a present good is worth more
Bohm-Bawerk gives three separate reasons a good today trades above the same good later. Two of them survived inside the tradition and one was rejected by Mises.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The first ground is circumstance: someone who expects to be better provided for later values a unit now above a unit then, and many people are in that position.
- The second is that people systematically discount the future, through incomplete imagination of it, weakness of will, and the chance of not being there.
- The third is the technical superiority of present goods, which rests on roundaboutness. Mises rejected this one from inside the tradition, and that argument is in the next lesson.
Interest, on this account, is not a charge added by lenders. It is the price that shows up because present goods and future goods trade at different values, and Book V of The Positive Theory of Capital gives three separate reasons why they do.
Three independent reasons, not three versions of one
- 1Different circumstancesPoorer now than later, so a unit now counts for more
- 2Systematic discountingImagination, will, and the chance of not being here
- 3Technical superiorityPresent goods can start a longer, more productive method
The first ground: want and provision differ over time
Book V, chapter II. If a person expects to be better supplied in the future than now, a unit available today meets a more urgent want than the same unit later, so it is worth more to them. Bohm-Bawerk's cases are people whose circumstances are expected to improve, and he notes that a present good also retains the option of being kept for later, while a future good has no way of being brought forward.
The argument is marginal utility from the previous course, applied across time instead of across uses.
The second ground: people discount the future anyway
Book V, chapter III. Even where circumstances are not expected to change, Bohm-Bawerk argues people undervalue future satisfactions, and he gives three mechanisms: an incomplete picture of future wants, a failure of resolve that prefers present enjoyment while knowing better, and the plain uncertainty of still being alive to collect.
He is explicit that this is a systematic tendency rather than a mistake some people make. That makes it a fact about human action rather than an error to be corrected, and it is the ground that later became central.
The third ground: present goods can start a longer method
Book V, chapter IV, and this is the contentious one. Present goods are also present means of production, so having them now lets you begin a longer method that yields more. A future good cannot do that, because the time it would have needed has already gone.
This ground is not independent of the previous two lessons: it is roundaboutness, imported into the theory of interest. That is exactly why it became a target.
What happened to the three
The first two are claims about how people value. The third is a claim about technology, and Mises argued in Human Action that it smuggles a productivity explanation back into a theory that was supposed to have removed one. He credits Bohm-Bawerk with demolishing the naive productivity accounts and then says he rebuilt a subtle version of the same thing. The next lesson gives that argument properly.
Check yourself
What is the first ground for the premium on present goods?
- That present goods can be invested
- That someone expecting to be better provided for later meets a more urgent want with a unit now
- That the future is uncertain
Show the answer
Answer: B.
Book V chapter II is about differences in want and provision between periods. Uncertainty appears in chapter III as one part of the second ground.Which mechanisms does Bohm-Bawerk give for systematic undervaluation of the future?
- Inflation, taxation and risk
- Incomplete imagination of future wants, weakness of will, and uncertainty of life
- Only uncertainty of life
Show the answer
Answer: B.
Book V chapter III gives all three, and treats the tendency as systematic rather than as an error some people make.Why was the third ground contentious inside the tradition?
- It is hard to measure
- It is a productivity argument, in a theory built to replace productivity explanations of interest
- Bohm-Bawerk later withdrew it
Show the answer
Answer: B.
Mises argued in Human Action that grounding interest in the productiveness of longer methods reintroduces the kind of explanation Bohm-Bawerk had himself dismantled.Sources
- Bohm-Bawerk, The Positive Theory of Capital, 1889, English translation by Smart, Book V, chapter II, on differences in want and provision between present and future.
- Bohm-Bawerk, The Positive Theory of Capital, Book V, chapter III, on the underestimate of the future and its three mechanisms.
- Bohm-Bawerk, The Positive Theory of Capital, Book V, chapter IV, on the technical superiority of present goods.
- Mises, Human Action, 1949, chapter XIX, section 2, on originary interest and on why he rejects the technological ground.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The $1,000 choice is invented, and the three explanations for it are written to separate the grounds rather than to describe anyone's reasoning.
- Bohm-Bawerk's own account of how the three combine to fix a rate is in Books VI and VII and is not covered here.