Frank Fetter Was the First Economist to Integrate Interest Theory into a Causal-Realist Conception of Economics

The genius of Carl Menger is seen as much in his perception of where economics needed to go and how it could get there as in his correction of the faulty course set for it by the British Classical economists. In the preface to his Principles of Economics, he wrote:

I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood.

The caliber of intellectuals in the second and third generations of Menger’s followers in the causal realist tradition, who rose to the challenge of building a general theory of economics, testifies to the power of Menger’s vision.

Frank Fetter was the first economist to integrate interest theory into a causal-realist conception of economics. In 1914 he wrote, “In an elementary textbook published in 1904 this [i.e., the Pure Time Preference] conception of the interest theory was embodied, not as a thing apart from, but as an integral part of, a general theory of value.” Thus, eight years before Ludwig von Mises would integrate money into causal-realist economic theory, Fetter had already integrated interest into Menger’s system. Reflecting on what he had accomplished, he wrote:

This interest theory was new in its order of development from elementary choice; in the priority it assigned to capitalization above contract interest; in its unified psychological explanation of all the phenomena of the surplus that emerges when undervalued expected incomes approach maturity, the surplus all being derived from the value of enjoyable (direct) goods, not by two separate theories, for consumption and production goods respectively; in the integration of the interest theory with the whole theory of distribution; and in a number of details necessarily related to these features.

--Jeffrey M. Herbener, ed., introduction to The Pure Time-Preference Theory of Interest (Auburn, AL: Ludwig von Mises Institute, 2011), 11-12.