Professor Rothbard and the Theory of Interest

You tell me your theory of interest, and I'll have a good guess about the rest of your economics. Interest is just another word for profit? You're a Ricardian. To collect interest is to exploit labor? You're a Marxian. The interest rate is wholly determined by the growth rate of capital? You're a Knightian. Interest is fundamentally a monetary phenomenon? You're a Keynesian.

Professor Rothbard is none of these. This much is not in dispute. The controversy comes when we begin to distinguish Rothbardians from Fisherians. Are time preferences of market participants and capital productivity independent co-determinants of the rate of interest, as Irving Fisher would have it? Or does time preference alone—the systematic discounting of the future—account for the payment that we call interest?

This latter view, which is properly attributed to Ludwig von Mises, is adopted by Professor Rothbard. Borrowing phraseology from Milton Friedman, it might be claimed that interest is always and everywhere a time-preference phenomenon in the same sense that inflation is always and everywhere a monetary phenomenon. Rothbard's defense of the time-preference theory of interest and his use of the theory as a building block in his treatise on economics inspires the remainder of this essay.

--Roger W. Garrison, "Professor Rothbard and the Theory of Interest," in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, ed. Walter Block and Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1988), 45.