The argument of the volume
Of the three great prices, the rate is the one that seems to belong least to human affairs and most to the order of things. The wage is paid to a person, the rent to an owner; but the rate of interest looks like a fact about time itself — the rate at which the future is discounted against the present, the terms on which now exchanges for later. A dollar today is worth more than a dollar next year, and the interest rate is simply how much more: a number that appears to measure the patience of the world, prior to anyone's choosing.
Yet on no other price has the discipline been so divided about what is actually being measured. That the rate is the reward for waiting; that it is the price of human impatience; that it is the yield of productive capital; that it is the price of parting with money — each has been proposed, defended, and found wanting, and they cannot all be right, for they locate the rate in different worlds: one in psychology, one in the technology of production, one in the money market. A price that everyone pays and few can define is a sign that the thing being priced is not the simple magnitude it appears, and the plates in print take the rival theories in turn, to show where each holds and where each fails.
What the rival theories were circling, the modern monetary economy has made plain. The anchor of every interest rate — the rate against which mortgages, bonds, and the debt of nations are priced — is not discovered in a market at all. It is set: announced by a central bank, a committee that meets, deliberates, and votes, steering the price of time toward goals it has chosen, against an unobservable natural rate it can only estimate. The price that looked like a fact of arithmetic turns out to be a decision, revised on a schedule; and the question the volume cannot finally avoid — who decides what an hour of waiting is worth — has, in the present economy, an institutional answer, and a distributive one, for a higher rate favors the creditor and a lower one the debtor, and the committee that sets it is choosing, every few weeks, a side. And behind that choice waits a deeper one: when the cost is borne now and the benefit, or the catastrophe averted, falls on generations not yet born, the rate at which their future is discounted decides how much their welfare weighs against our own — a reckoning less of arithmetic than of conscience, on which the same impersonal-looking number sits in silent judgment.
The argument remains open. What follows is an attempt to fix its exact edges.
The twelve plates of this volume
- i The Usuryin print the oldest question: is interest legitimate, earned or extracted — from Aristotle's barren money to the slow rehabilitation of the lender's claim. Read the plate →
- ii The Abstinencein print Senior's reward for waiting; interest as the price of abstaining from present consumption. Read the plate →
- iii The Agioin print time preference: Böhm-Bawerk and Fisher, and interest as the premium on present over future goods — impatience meeting the productivity of waiting. Read the plate →
- iv The Productivityin print interest as the marginal product of capital, and the capital controversy that finds the quantity of capital cannot be measured without the rate it is meant to set. Read the plate →
- v The Liquidityin print Keynes's liquidity preference: interest as the reward for parting with money — a monetary phenomenon set in the money market, not the price of thrift. Read the plate →
- vi The Naturalin print Wicksell's natural rate against the market rate; the cumulative process, and r-star, the rate that cannot be seen. Read the plate →
- vii The Realin print real against nominal; Fisher's equation, and the part of every rate that is only the expectation of inflation. Read the plate →
- viii The Policyin print the rate as an administered price: a committee sets the anchor of all rates, and the price of time becomes a decision steered toward chosen goals. Read the plate →
- ix The Zeroin print the zero lower bound, secular stagnation, and negative rates — the price of time at and below nothing. Read the plate →
- x The Discountin print present value and the valuation of the future; the ethics of the discount rate, from Ramsey to the price of the climate. Read the plate →
- xi The Impatiencein print hyperbolic discounting and present bias; the rate as a psychology that contradicts itself across time. Read the plate →
- xii The Curvein print the term structure; the many rates that are not one, and what the slope between them is thought to foretell. Read the plate →
In closing
This volume took up the most impersonal-seeming of the three prices and found it the least settled. The rate looks like a fact about time — how much more a thing is worth now than later — but the discipline has never agreed on what makes it what it is, and the plates in print followed the disagreement to its root.
The oldest verdict was that interest is theft, the breeding of barren money, a charge for time that belongs to no one to sell; and though the charge was answered, it was answered only by naming something the lender gives up, which left open what that something is. Impatience, said the one school: the rate is the premium we place on the present, the agio of now over later. The productivity of capital, said another: the rate is what the machines throw off — until the capital controversy showed that the machines cannot be counted except at the rate they are meant to determine. The price of money, said Keynes: not the reward for thrift but for parting with liquidity, a monetary thing set in the money market and held up, in part, by mere convention. Each theory located the rate in a different world, and none could claim it whole.
And what the theories were circling, the central bank made literal: the price of time is administered. The anchor of all rates is set by a committee, steered toward chosen goals, taking — in its level — a side in the oldest contest of all, between those who have money and those who need it. So the rate joins the wage and the rent in the lesson the family of prices was assembled to teach. The wage is part worth and part power; the rent is the toll of position; the rate is part real fact and part decision — and of the three it is the one where the decision has become most explicit, made by an institution built for the purpose and announced with a date and a vote. And the contest the rate conceals runs deeper still than the one between lender and borrower, for when the rate is turned upon the far future it sets the terms between the living and the unborn — and Frank Ramsey held that to weigh a later generation's welfare for less merely because its lives fall after ours is no finding of economics but a quiet injustice. The price of time is not read off the world. It is chosen — and the choosing, like every price in this family, is a verdict in a contest that the number is arranged to hide.
If the price of time is set by a committee and not by the world, then when the future is discounted — a project deferred, a debt repaid, a life lived later rather than now — at whose rate, and in whose interest, was it discounted?