by Mahr
[Title Page and Preface]: The title page and preface of Alexander Mahr's 1929 work on interest theory. The author outlines his goal to address unresolved problems in interest theory, distinguishing between a general theoretical part and a realistic part, while noting that the work includes a critique of modern theories to ground his positive presentation. [Table of Contents]: A detailed table of contents for the book. It outlines two main sections: a survey of existing interest theories (Böhm-Bawerk, Cassel, Schumpeter) and a positive presentation covering the law of returns, price formation of production factors, capital formation through saving, and the influence of interest rates on demand and supply. [Table of Contents and Introduction to Böhm-Bawerk's Theory]: This segment provides a brief overview of the upcoming chapters, focusing on the movements of interest rates under changing money values and the relationship between discount rates and the business cycle. It then begins a detailed exposition of Eugen von Böhm-Bawerk's interest theory, noting its foundational importance for modern economists and addressing common criticisms that often stem from misunderstandings of his core arguments. [Böhm-Bawerk's Three Reasons for Interest]: Mahr details Böhm-Bawerk's three primary reasons for the higher valuation of present goods over future goods: differences in supply and demand across time periods, the systematic undervaluation of future needs (psychological factors), and the technical superiority of present goods due to the greater productivity of longer, roundabout production processes. The segment explains the role of the subsistence fund (Vermögensstock) in sustaining the population during these production periods and clarifies the concept of 'average production period' as an arithmetic mean of labor applications. [The Determination of the Interest Rate and the Labor Market]: This section explores Böhm-Bawerk's model of how the interest rate and wage levels are determined through the interaction of the subsistence fund and the labor supply. It explains how entrepreneurs choose the length of the production period to maximize profit, leading to an equilibrium where all capital and labor are employed. Mahr also discusses the impact of qualified labor, consumption credit, and the 'economic sense' (thrift) of the population on the interest rate. [Critique of Böhm-Bawerk: The Lindberg Objection]: Mahr presents a critique of Böhm-Bawerk, specifically focusing on the psychological assumption of future undervaluation and the mathematical critique by Jakob Lindberg. Lindberg argued that under Böhm-Bawerk's premises, entrepreneurs would infinitely extend production periods, driving wages to the subsistence minimum. Mahr counters this by noting that capital is often 'bound' in existing structures and cannot be shifted without loss, and that historical data shows rising real wages alongside increased capital intensity. [Modern Interest Theories: Fisher, Fetter, Wicksell, and Cassel]: Mahr reviews other modern interest theories. He discusses Irving Fisher's synthesis of Böhm-Bawerk's reasons, Frank Fetter's pure psychological agio theory, and Knut Wicksell's crucial distinction between the 'natural' interest rate and the money rate. He provides an extensive critique of Gustav Cassel's 'waiting' and 'capital disposition' concepts, arguing they are terminologically flawed and difficult to integrate into a formal system of equations, despite Cassel's valuable insights into saving motives. [Dynamic and Credit-Based Theories: Schumpeter and Hahn]: This segment examines Joseph Schumpeter's dynamic theory, where interest is a 'tax' on entrepreneurial profit made possible by bank credit in a developing economy, and Albert Hahn's controversial view that credit creation, not saving, is the primary driver of capital formation. Mahr critiques Schumpeter's claim that interest disappears in a static state and rejects Hahn's theory, arguing that excessive credit expansion leads to inflation rather than sustainable capital growth. [The Law of Returns in Roundabout Production]: Mahr begins his 'positive' exposition by defining capital as 'produced means of acquisition' and distinguishing between horizontal and vertical production expansion. He argues that the technical law of returns (increasing or decreasing) is heavily influenced by the money supply; for a technical increase in products to manifest as interest (value surplus), the money supply must generally expand proportionally. He also discusses how market size and technical progress shift the productivity scales of different production methods. [Pricing of Production Factors and Imputation (Zurechnung)]: Drawing on Hans Mayer, Mahr discusses the problem of 'imputation' (Zurechnung)—how to assign value to individual factors of production (land, labor, capital) when they must work together. He explains that while physical shares cannot be separated, the marginal contribution of a factor can be determined through variation. This marginal contribution, adjusted for the time-discount (interest), determines the market price of the production factor. [The Productive Interest and the Wage Fund]: Mahr explains productive interest as the value surplus resulting from roundabout production. He refines the relationship between the 'production fund' and the 'wage fund,' arguing they are not identical because the production fund includes fixed capital (machines, buildings) that provides services over a period longer than the average production cycle. He provides a mathematical formula for the distribution of the wage fund across different labor qualities and production lengths. [Capital Formation through Saving]: Mahr analyzes the psychological and economic motives for saving. He identifies three types of behavior: striving for equal consumption over time, favoring the future, or favoring the present. Saving is driven by the need for reserves (age, illness), specific future goals (buying a house, education), and the desire for social power and prestige associated with wealth. He notes that in a progressing economy, the progressive (future-oriented) type of saver predominates. [Interest and Capital Demand: Housing and Public Debt]: This segment examines how interest rates affect the demand for capital in non-productive sectors. Mahr highlights the housing market as the most interest-elastic sector of consumption. He also discusses installment buying (Ratengeschäft), where risk premiums often outweigh interest rates, and state credit demand. He argues that while political state spending is often inelastic, state investments in infrastructure are sensitive to interest rates due to long-term tax implications. [The Impossibility of Zero Interest in a Market Economy]: Mahr critiques Cassel's theory that interest cannot fall below 3% due to human lifespan. Instead, Mahr argues that zero interest is impossible in a private property economy because as interest rates approach zero, the value of land (and other rent-bearing assets) would approach infinity. This would satisfy all wealth-accumulation motives, causing saving to stop before interest hits zero. He concedes that zero interest might be theoretically possible in a socialist or 'agrarian-socialist' state (following Henry George) where land is not private property. [The Money Market vs. the Investment Market]: Mahr distinguishes between the 'money market' (short-term) and the 'investment market' (long-term). He critiques Georg Halm's theory of a unified capitalization rate, arguing that transaction costs and uncertainty prevent perfect arbitrage between these markets. He explains why dividend yields, discount rates, and bond yields often diverge during different phases of the business cycle, noting that stock prices only partially capitalize temporary profit increases. [Interest Rates and Changing Money Values (Inflation/Deflation)]: This segment analyzes how changes in the value of money affect interest. Mahr distinguishes between 'goods-induced' and 'money-induced' changes. He explains the mechanism of 'forced saving' during inflation, where entrepreneurs gain at the expense of wage-earners and creditors. However, he notes that once inflation is anticipated, the market adjusts (e.g., through 'gold clauses' or high risk premiums), neutralizing the stimulative effect on production. [The Discount Rate and the Business Cycle]: Mahr applies Wicksell's theory of the 'natural' vs. 'money' interest rate to the business cycle. He explains how a discount rate kept artificially low by banks triggers an expansion of credit and production, leading to a boom. Eventually, the limits of credit expansion (or metal reserves) force banks to raise rates, causing a crisis as entrepreneurs and merchants are forced to liquidate. He concludes that the divergence between short-term and long-term rates is a rational response to fluctuating production returns during the cycle. [Author Index]: An alphabetical index of authors cited throughout the work, including major figures like Böhm-Bawerk, Cassel, Fisher, Schumpeter, and Wicksell.
The title page and preface of Alexander Mahr's 1929 work on interest theory. The author outlines his goal to address unresolved problems in interest theory, distinguishing between a general theoretical part and a realistic part, while noting that the work includes a critique of modern theories to ground his positive presentation.
Read full textA detailed table of contents for the book. It outlines two main sections: a survey of existing interest theories (Böhm-Bawerk, Cassel, Schumpeter) and a positive presentation covering the law of returns, price formation of production factors, capital formation through saving, and the influence of interest rates on demand and supply.
Read full textThis segment provides a brief overview of the upcoming chapters, focusing on the movements of interest rates under changing money values and the relationship between discount rates and the business cycle. It then begins a detailed exposition of Eugen von Böhm-Bawerk's interest theory, noting its foundational importance for modern economists and addressing common criticisms that often stem from misunderstandings of his core arguments.
Read full textMahr details Böhm-Bawerk's three primary reasons for the higher valuation of present goods over future goods: differences in supply and demand across time periods, the systematic undervaluation of future needs (psychological factors), and the technical superiority of present goods due to the greater productivity of longer, roundabout production processes. The segment explains the role of the subsistence fund (Vermögensstock) in sustaining the population during these production periods and clarifies the concept of 'average production period' as an arithmetic mean of labor applications.
Read full textThis section explores Böhm-Bawerk's model of how the interest rate and wage levels are determined through the interaction of the subsistence fund and the labor supply. It explains how entrepreneurs choose the length of the production period to maximize profit, leading to an equilibrium where all capital and labor are employed. Mahr also discusses the impact of qualified labor, consumption credit, and the 'economic sense' (thrift) of the population on the interest rate.
Read full textMahr presents a critique of Böhm-Bawerk, specifically focusing on the psychological assumption of future undervaluation and the mathematical critique by Jakob Lindberg. Lindberg argued that under Böhm-Bawerk's premises, entrepreneurs would infinitely extend production periods, driving wages to the subsistence minimum. Mahr counters this by noting that capital is often 'bound' in existing structures and cannot be shifted without loss, and that historical data shows rising real wages alongside increased capital intensity.
Read full textMahr reviews other modern interest theories. He discusses Irving Fisher's synthesis of Böhm-Bawerk's reasons, Frank Fetter's pure psychological agio theory, and Knut Wicksell's crucial distinction between the 'natural' interest rate and the money rate. He provides an extensive critique of Gustav Cassel's 'waiting' and 'capital disposition' concepts, arguing they are terminologically flawed and difficult to integrate into a formal system of equations, despite Cassel's valuable insights into saving motives.
Read full textThis segment examines Joseph Schumpeter's dynamic theory, where interest is a 'tax' on entrepreneurial profit made possible by bank credit in a developing economy, and Albert Hahn's controversial view that credit creation, not saving, is the primary driver of capital formation. Mahr critiques Schumpeter's claim that interest disappears in a static state and rejects Hahn's theory, arguing that excessive credit expansion leads to inflation rather than sustainable capital growth.
Read full textMahr begins his 'positive' exposition by defining capital as 'produced means of acquisition' and distinguishing between horizontal and vertical production expansion. He argues that the technical law of returns (increasing or decreasing) is heavily influenced by the money supply; for a technical increase in products to manifest as interest (value surplus), the money supply must generally expand proportionally. He also discusses how market size and technical progress shift the productivity scales of different production methods.
Read full textDrawing on Hans Mayer, Mahr discusses the problem of 'imputation' (Zurechnung)—how to assign value to individual factors of production (land, labor, capital) when they must work together. He explains that while physical shares cannot be separated, the marginal contribution of a factor can be determined through variation. This marginal contribution, adjusted for the time-discount (interest), determines the market price of the production factor.
Read full textMahr explains productive interest as the value surplus resulting from roundabout production. He refines the relationship between the 'production fund' and the 'wage fund,' arguing they are not identical because the production fund includes fixed capital (machines, buildings) that provides services over a period longer than the average production cycle. He provides a mathematical formula for the distribution of the wage fund across different labor qualities and production lengths.
Read full textMahr analyzes the psychological and economic motives for saving. He identifies three types of behavior: striving for equal consumption over time, favoring the future, or favoring the present. Saving is driven by the need for reserves (age, illness), specific future goals (buying a house, education), and the desire for social power and prestige associated with wealth. He notes that in a progressing economy, the progressive (future-oriented) type of saver predominates.
Read full textThis segment examines how interest rates affect the demand for capital in non-productive sectors. Mahr highlights the housing market as the most interest-elastic sector of consumption. He also discusses installment buying (Ratengeschäft), where risk premiums often outweigh interest rates, and state credit demand. He argues that while political state spending is often inelastic, state investments in infrastructure are sensitive to interest rates due to long-term tax implications.
Read full textMahr critiques Cassel's theory that interest cannot fall below 3% due to human lifespan. Instead, Mahr argues that zero interest is impossible in a private property economy because as interest rates approach zero, the value of land (and other rent-bearing assets) would approach infinity. This would satisfy all wealth-accumulation motives, causing saving to stop before interest hits zero. He concedes that zero interest might be theoretically possible in a socialist or 'agrarian-socialist' state (following Henry George) where land is not private property.
Read full textMahr distinguishes between the 'money market' (short-term) and the 'investment market' (long-term). He critiques Georg Halm's theory of a unified capitalization rate, arguing that transaction costs and uncertainty prevent perfect arbitrage between these markets. He explains why dividend yields, discount rates, and bond yields often diverge during different phases of the business cycle, noting that stock prices only partially capitalize temporary profit increases.
Read full textThis segment analyzes how changes in the value of money affect interest. Mahr distinguishes between 'goods-induced' and 'money-induced' changes. He explains the mechanism of 'forced saving' during inflation, where entrepreneurs gain at the expense of wage-earners and creditors. However, he notes that once inflation is anticipated, the market adjusts (e.g., through 'gold clauses' or high risk premiums), neutralizing the stimulative effect on production.
Read full textMahr applies Wicksell's theory of the 'natural' vs. 'money' interest rate to the business cycle. He explains how a discount rate kept artificially low by banks triggers an expansion of credit and production, leading to a boom. Eventually, the limits of credit expansion (or metal reserves) force banks to raise rates, causing a crisis as entrepreneurs and merchants are forced to liquidate. He concludes that the divergence between short-term and long-term rates is a rational response to fluctuating production returns during the cycle.
Read full textAn alphabetical index of authors cited throughout the work, including major figures like Böhm-Bawerk, Cassel, Fisher, Schumpeter, and Wicksell.
Read full text