Future Goods Trade at a Discount or Present Goods Trade at a Premium; the Payment of Interest Is a Direct Reflection of This Intertemporal Value Differential; This Is Called Böhm-Bawerk's “Agio Theory”

Early in his career, Böhm-Bawerk took up a central question that was much discussed by his contemporaries and predecessors. “Is there any justification for the payment of interest to the owners of capital?” The justification, in his view, rests on a simple fact of reality: people value present goods more highly than future goods of the same quantity and quality. Future goods trade at a discount, or alternatively, present goods trade at a premium. The payment of interest is a direct reflection of this intertemporal value differential. This interest, or agio, paid to capitalists allows workers to receive income on a more timely basis than would otherwise be possible. Böhm-Bawerk's “agio theory” and its implications for the alternative “exploitation theory” were undoubtedly enough to win him recognition by historians of economic thought. But with it he broke new ground and was able to parlay his refutation of socialist doctrine into a new understanding of the capitalist system. His Positive Theory culminates in a macroeconomic model of general equilibrium that serves to illuminate the classical issues of capital accumulation and technical progress, to resolve the neoclassical problem of the existence and the determination of the rate of interest, and to do still more.

--Roger W. Garrison, “Eugen von Böhm-Bawerk: Capital, Interest, and Time,” in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 116.