Gottfried Haberler, “Irving Fisher’s ‘Theory of Interest’” (1931)

Gottfried Haberler’s review essay evaluates Fisher’s theory as a major achievement whose logical completeness exceeds its empirical development. Its four sections reconstruct the argument, criticize its concepts of income and investment, reconsider its relationship to rival interest theories, and identify missing connections with production and banking. Haberler accepts Fisher’s claim that the new book changes the presentation rather than the substance of his earlier theory. The increased emphasis on “investment opportunity” answers critics who mistook Fisher’s objections to productivity theories for a denial that productivity influences interest. The review’s governing distinction is between the validity of Fisher’s formal framework and the adequacy of its economic specification:

We shall therefore confine ourselves to inquiring whether the empirical assumptions fit the case and the theory is complete, whether more might not be brought out by the introduction of certain detailed empirical assumptions.

Section I traces Fisher’s explanation from income to capital valuation and the exchange of present against future goods. Psychic income, or enjoyment, stands behind the services of consumption goods; capital represents discounted future income. Interest depends jointly on individual impatience and objective investment opportunities. Haberler explains Fisher’s three successive approximations: first, certain and fixed income streams adjustable only through borrowing and lending; second, a choice between investments yielding different streams; third, the introduction of risk. The second approximation incorporates productivity and producers’ credit: individuals select the investment with the greatest discounted present value, then adjust its timing through loans to suit their preferences. Risk qualifies the uniform market rate but receives a less developed treatment. Haberler praises the resulting system’s elegance while asking whether its generality leaves important facts unexplained.

Section II challenges the foundations without claiming to overturn the theory built upon them. Fisher’s reliance on money expenditure as a measure of real income confuses numerical measurement with comparison through choice. Individuals can rank bundles even in barter, although neither utility nor enjoyment admits proportional numerical comparisons. A ten-percent increase in money income does not establish an equivalent increase in psychic income. Index-number comparisons must instead be interpreted through prices and the individual’s indifference between alternatives.

The individual's act of choice is the ultimate elementary fact to which economic analysis can carry us.

This principle also informs Haberler’s objection to defining investment as deferred enjoyment. Successful enterprise and accumulation can provide immediate satisfaction; consuming an unpleasant medicine can produce benefits only later. The timing of pleasure therefore cannot distinguish consumption from investment. Haberler proposes a distinction based on the purpose of transforming or destroying goods: consumption does not aim at producing other goods or increasing their value, whereas production or investment does. This conceptual correction preserves the distinction while disconnecting it from the uncertain timing of subjective satisfaction.

Section III defends Fisher against the charge of neglecting productivity but questions how much his framework explains about it. Fisher accommodates the increased yield of roundabout production and the advantages of durability, yet does not investigate their technical basis sufficiently. Haberler then reconstructs the disagreement with Böhm-Bawerk over whether the technical superiority of present goods can independently explain interest. The crucial issue is the finite economic horizon. When the maximum yield of longer production lies beyond that horizon, earlier resources retain an advantage within the relevant period; when it lies inside, Böhm-Bawerk concedes that the technical ground loses its independent force. Whether the limited horizon itself belongs to the other grounds of interest is partly a question of terminology. Haberler treats the empirical extent of yield-increase as more consequential than the polemical division between schools.

I think, therefore, that I am justified in concluding that the difference between the theories of Fisher and Böhm-Bawerk is smaller than the two eminent authors were willing, in the heat of the combat, to admit.

A similar clarification concerns explaining interest’s existence separately from its rate. Fisher’s neutral definition permits positive, negative, or zero interest; Böhm-Bawerk generally means positive interest. The distinction makes sense under the latter usage but adds little under the former. Haberler also finds room within Fisher’s framework for Schumpeter’s entrepreneurial demand for capital as an additional source of interest. He rejects, however, the empirical claim that a static economy must have zero interest. The framework’s capacity to accommodate that claim demonstrates its abstractness rather than confirming it.

Section IV gives this criticism its strongest application. Fisher does not sufficiently connect interest with wages, rents, capital accumulation, and the changing organization of production. His treatment of interest and prices emphasizes statistical relationships without developing the monetary mechanism that Haberler finds in Wicksell, Mises, and Hayek. Haberler distinguishes Wicksell’s natural and money rates from Fisher’s real and money interest: the former concerns the effective bank rate, not simply adjustment for price changes.

An “artificial” lowering of the rate of interest through the banking system brings about an excessive lengthening of the production-period; roundabout production processes are started which afterwards prove to be too long and cannot be maintained.

For Haberler, this mechanism links banking institutions to crises and answers theories blaming excessive saving. The omission is not a deductive error, but a failure to work out the consequences of interest for the capitalist production process. The review thus combines reconciliation among interest theories with a demand for empirically grounded capital and monetary analysis. Its concluding praise remains substantial: Fisher supplies the indispensable foundation from which future systematic theories must proceed, even though that foundation requires further development.