The Pure Time Preference Theory: A Neoclassical Critique

Abstract

The pure time preference theory of Ludwig von Mises and Murray N. Rothbard is a cornerstone of the Austrian theory of interest. In the past, several attempts were made to demonstrate that this theory might be inconsistent. In this paper, the original Böhm-Bawerk theory is illustrated in a simple neoclassical model, and it is shown that there might be a fundamental flaw in the pure time preference theory. It is suggested that the notions of want and good must be explicitly separated, and it is concluded that the time preference as well as the subjective exchange ratio between present goods and future goods may take on any value.

Keywords: time preference, theory of interest, Austrian school, Ludwig von Mises

JEL Classification: B25, E43, B53