Chapter Three: Time Preference and the Labor Theory of Value
In the last chapter, we referred to one valid marginalist criticism of the Labor Theory: its lack of an explicit mechanism.
But there is another valid contribution of the marginalists, or more specifically the Austrians, that must be taken into account
by any modern Labor Theory, if it is to have any claim to relevance. That contribution is time preference theory.
The principle of time-preference was first stated clearly by Eugen von Böhm-Bawerk. After a painstaking historical survey
of past theories of interest--not only the "productivity" and "abstinence" theories of the later classical political economists
(or vulgar political economists, as Marx would have it), but the exploitation theories of Rodbertus, Marx, and the other socialists--he
set forth his own explanation:
The loan is a real exchange of present goods against
future goods.... [P]resent goods invariably possess a greater value than future goods of the same number
and kind, and therefore a definite sum of present goods can, as a rule, only be purchased by a larger sum of future goods.
Present goods possess an agio in future goods. This agio is interest. It is not a separate equivalent
for a separate and durable use of the loaned goods, for that is inconceivable; it is a part equivalent of the loaned sum,
kept separate for practical reasons. The replacement of the capital + the interest constitutes the full equivalent.1
This was, he argued, incompatible with the labor theory of value: "Logically carried out, this [the labor theory]
could leave no room for the phenomenon of interest."2
This is as good a place as any, before we go to the more central issues of time-preference's relation to our labor theory
developed in this book, to examine another side issue: the extent to which time-preference is mutually exclusive of other
defenses of interest and profit, as Austrians have claimed. Böhm-Bawerk, of course, stressed both the uniqueness of his contribution
and the inadequacy of earlier attempts to justify interest. He was especially dismissive of Senior's abstinence theory, pointing
out that Lasalle was right in arguing
that the existence and height of interest by no means invariably correspond with the existence and the height of a "sacrifice
of abstinence." Interest, in exceptional cases, is received where there has been no individual sacrifice of abstinence. High
interest is often got where the sacrifice of the abstinence is very trifling--as in the case of Lasalle's millionaire--and
"low interest" is often got where the sacrifice entailed by the abstinence is very great. The hardly saved sovereign which
the domestic servant puts in the savings bank bears, absolutely and relatively, less interest than the lightly spared thousands
which the millionaire puts to fructify in debenture and mortgage funds. These phenomena fit badly into a theory which explains
interest quite universally as a "wage of abstinence."....3
In response to the idea that abstinence from consumption was a positive "sacrifice" deserving of compensation in its own
right, Böhm-Bawerk proposed this case:
I work for a whole day at the planting of fruit trees in the expectation that they will bear fruit for me in ten years.
In the night following comes a storm and entirely destroys the whole plantation. How great is the sacrifice which I have made...
in vain? I think every one will say--a lost day of work, and nothing more. And now I put the question, is my sacrifice in
any way greater that the storm does not come, and that the trees, without any further exertion on my part, bear fruit in ten
years? If I do a day's work and have to wait ten years to get a return from it, do I sacrifice more than if I do a day's work,
and, by reason of the destructive storm, must wait to all eternity for its return?4
In response to Cournelle's similar "sacrifice" theory of interest, Böhm-Bawerk joked, "one might say that Cournelle
would have had almost as much justification, theoretically speaking, if he had pronounced the bodily labour of pocketing the
interest, or of cutting the coupons, to be the ground and basis of interest."5
The logical response to Böhm-Bawerk's critique, from the point of view of Marshall's "real cost" theory, is to retreat
to defining "sacrifice" in terms of "opportunity cost." And that is exactly what Marshall did, as we saw in the previous chapter:
the "sacrifice" of the landlord and capitalist was simply the forebearance to consume what was in one's power to consume.
And in denying this opportunity cost as an absolute sacrifice in the same sense as labor, Böhm-Bawerk laid the ground for
Dobb's demolition of "abstinence" as a "sacrifice" comparable to labor.
In any case, regardless of its uniqueness as a subjective mechanism, Böhm-Bawerk's time preference theory (that a smaller
amount now is worth a greater amount later) bears, in practical terms, a close resemblance to the "abstinence" of Nassau Senior
and Alfred Marshall. All these theories amount to ascribing a value-creating quality to time: to make it worth my while to
abstain from present consumption, I must receive a greater amount in the future. And all of them are based on some form of
pain or hardship entailed in foregoing present for the sake of future consumption. It makes more sense to treat them as a
cluster of related theories than as mutually exclusive rivals.
Murray Rothbard, the most famous recent inheritor of the Austrian mantle, was especially prone to blur the distinction
between time-preference and "waiting":
What has been the contribution of these product-owners, or "capitalists," to the production process? It is this: the saving
and restriction of consumption, instead of being done by the owners of land and labor, has been done by the capitalists.
The capitalists originally saved, say, 95 ounces of gold which they could have then spent on consumers' goods. They refrained
from doing so, however, and, instead, advanced the money to the original owners of the factors. They paid the
latter for their services while they were working, thus advancing them money before the product was actually produced and
sold to the consumers. The capitalists, therefore, made an essential contribution to production. They relieved the owners
of the original factors from the necessity of sacrificing present goods and waiting for future goods....
Even if financial returns and consumer demand are certain, the capitalists are still providing
present goods to the owners of labor and land and thus relieving
them of the burden of waiting until the future goods are produced and finally transformed into consumers' goods.6
Roger W. Garrison argued, from such evidence, that the concept of "waiting" as a factor of production was compatible with
the time-preference of Mises and Rothbard.
Neither Mises nor Rothbard has specifically addressed the question of waiting as a factor of production, but passages can
be found in the writings of each suggesting that the time-preference view and the waiting-as-a-factor view are to some extent
To return to our main line of discussion: there has been a great reluctance among Austrians, generally speaking, to deal
explicitly with the comparative roles of time-preference and institutional factors as influences on interest rates, or with
the extent to which the steepness of time-preference can be altered by institutional factors. At times, the Austrians explicitly
deny that institutional factors have no influence on interest.
For example, Böhm-Bawerk denied that the difference in value between a given amount of money today and the same amount
five years from now is, "as might be thought, a result of social institutions which have created interest and fixed it
at 5 per cent."8 Time preference alone is the reason for the relative low value of production (future) goods,
compared to finished (present) goods:
This, and nothing else, is the foundation of the so-called "cheap" buying of production instruments, and especially of
labour, which the Socialists rightly explain as the source of profit on capital, but wrongly interpret, in round terms, as
the result of a robbery or exploitation of the working classes by the propertied classes.9
At times, however, Böhm-Bawerk moderated this stance with the concession that monopoly and other forms of exploitation
might, in certain cases, increase the rate of profit at the expense of labor.
Now, of course, the circumstances unfavourable to buyers may be corrected by active competition among sellers.... But,
every now and then, something will suspend the capitalists' competition, and then those unfortunates, whom fate has thrown
on a local market ruled by monopoly, are delivered over to the discretion of the adversary. Hence direct usury, of which the
poor borrower is only too often the victim; and hence the low wages forcibly exploited from the workers....
It is not my business to put excesses like these, where there actually is exploitation, under the aegis of that favourable
opinion I pronounced above as to the essence of interest. But, on the other hand, I must say with all emphasis, that what
we might stigmatise as "usury" does not consist in the obtaining of a gain out of a loan, or out of the buying of labour,
but in the immoderate extent of that gain.... Some gain or profit on capital there would be if there were no compulsion on
the poor, and no monopolising of property; and some gain there must be. It is only the height of this gain where, in particular
cases, it reaches an excess, that is open to criticism, and, of course, the very unequal conditions of wealth in our modern
communities bring us unpleasantly near the danger of exploitation and of usurious rates of interest.10
So here Böhm-Bawerk acknowledged, at least in principle, that institutional factors could affect interest rates, and that
the distribution of wealth could affect the steepness of time-preference.
Although he made this concession in principle, Böhm-Bawerk for the most part stuck to an ahistorical treatment of the actual
origins of the distribution of wealth, taking as a given that the propertied classes were in a position of having surplus
property for investment as a result of their past thrift or productivity. Often he did not address the issue at all, but simply
assumed the present distribution of property as his starting point.
What, then, are the capitalists as regards the community?--In a word, they are merchants who have present goods to sell.
They are the fortunate possessors of a stock of goods which they do not require for the personal needs of the moment. They
exchange their stock, therefore, into future goods of some form or another....11
Böhm-Bawerk was far too modest on their behalf, in ascribing this possession of present goods to "fortune." Far from being,
as a class, the passive recipients of mere good luck, the capitalists have MADE their own luck. And the history of this, their
good fortune, is written in letters of blood and fire.
In keeping with this modesty, Böhm-Bawerk resorted to a Robinsonade on the accumulation of capital.
In our science there are three views in circulation as to the formation of capital. One finds its origin in Saving, a second
in Production, and a third in both together. Of these the third enjoys the widest acceptance, and it is also the correct one.12
He then illustrated the principle with the example of a solitary man saving the product of his labor and living off the
surplus food while he crafted a bow and arrows and other tools. From this island scenario, he went on to society in the large,
describing how a nation of ten million saved so many millions of its ten million labor years annually.13 That those
actually deferring consumption from the proceeds of their labor might not be the same ones investing those savings, or reaping
the fruits of investment, or that they might have no say in the matter, was an issue set aside entirely--perhaps as complicating
the picture unnecessarily.
The propertyless laboring classes, like the capitalists, just happened to be there; perhaps, like Topsy, they "just growed."
Over and against this supply of present goods stands, as Demand:--
1. An enormous number of wage-earners who cannot employ their labour remuneratively by working on their own account, and
are accordingly, as a body, inclined and ready to sell the future product of their labour for a considerably less amount of
2. A number of independent producers, themselves working, who by an advance of present goods are put in a position to prolong
the process, and thus increase the productiveness of their personal labour...
3. A small number of persons who, on account of urgent personal wants, seek credit for purposes of consumption, and are
also ready to pay an agio for present goods.14
It was this inability of the first group to employ their labor remuneratively by working on their own account, Böhm-Bawerk
explained, that made them dependent on the capitalist. Their lack of resources to tide them over until the completion of long-term
production processes was the "sole" reason for their dependence.
...in the loss of time which is, as a rule, bound up with the capitalist process, lies the sole ground of that much-talked-of
and much-deplored dependence of labourer on capitalist.... It is only because the labourers cannot wait till the roundabout
process... delivers up its products ready for consumption, that they become economically dependent on the capitalists who
already hold in their possession what we have called "intermediate products."15
Why the laborers might lack individual or collective property in their means of production, or be unable through cooperative
effort to mobilize their own "labor fund" in the production interval, Böhm-Bawerk did not say. Why the capitalists happened
to be in possession of so much superfluous wealth, he likewise did not speculate. That the bulk of a nation's productive resources
should be concentrated in the hands of a few people, rather than those of the laboring majority, is by no means a self-evident
necessity. Böhm-Bawerk himself accepted it as altogether unremarkable. For the cause of such an odd situation, therefore,
we will have to look elsewhere than in his work.
The answer lies not in economic theory, but in history. The existing distribution of property among economic classes, about
which Böhm-Bawerk was so coy, is the historic outcome of State violence. We shall examine, in a later chapter, the process
of primitive accumulation by which the laboring majority has been forcibly robbed of its property in the means of production,
transformed into a propertyless laboring class, and since then prevented by law and privilege from obtaining unfettered access
It will suffice for the moment to say that, although time preference no doubt holds true universally even when property
is evenly distributed, the present after-effects of primitive accumulation render time-preference much steeper than it would
otherwise be. Time preference is not a constant. It is skewed much more to the present for a laborer without independent access
to the means of production, or to subsistence or security. Even the vulgar political economists recognized that the degree
of poverty among the laboring classes determined their level of wages, and hence the level of profit.16
But what of the residuum of time preference that would exist even in a genuine market economy, without legal privilege
to capital, in which the producers retained their own means of production? How can the principle of time preference be reconciled
to the labor theory of value?
Even if today's labor is exchanged for tomorrow's labor at a premium, it is still an exchange of labor. Maurice Dobb, for
instance, suggested that time-preference might be treated as a scarcity rent on present labor.
It amounted to an explanation in terms of the relative scarcity, or limited application, of labour applied to particular
uses--namely, in the form of stored-up labour embodied in technical processes involving a lengthy "period of production";
a scarcity which persisted by reason of the short-sightedness of human nature. As a result of this under-development of the
productive resources, the ownership of money-capital, which in existing society provided the only means by which lengthy production-processes
were able to be undertaken, carried with it the power to exact a rent of this scarcity. As a landlord could exact the price
of a scarcity imposed by objective nature, so, it would seem, the capitalist could exact the price of a scarcity the subjective
nature of man.17
Dobb did not made an adequate distinction between the scarcity of present versus future labor that exists naturally as
a result of the human preference for present consumption versus postponement; and the artificial scarcity created by a certain
class' monopoly of access to the means of production. But even assuming a market economy based on producers' cooperatives,
the point is valid. When labor abstains from present consumption to accumulate its own capital, time-preference is simply
an added form of disutility of present labor, as opposed to future labor. It is just another factor in the "higgling of the
market," by which labor's product is allocated among laborers.
In an economy of distributive property ownership, as would have existed had the free market been allowed to develop without
large-scale robbery, time-preference would affect only laborers' calculations of their own present consumption versus their
own future consumption. All consumption, present or future, would be beyond question the result of labor. It is only in a
capitalist (i.e., statist) economy that a propertied class, with superfluous wealth far beyond its ability to consume, can
keep itself in idleness by lending the means of subsistence to producers in return for a claim on future output.
1. Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of Economical Theory, trans. William Smart (New
York: Brentanno’s, 1922) 259.
2. Ibid. 269.
3. Ibid. 277.
4. Ibid. 281.
5. Ibid. 303.
6. Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Auburn University, Alabama: Ludwig
von Mises Institute, 1993) 294-95, 298.
7. Roger W. Garrison, “Professor rothbard and the Theory of Interest,” in Walter Block and Llewellyn H. Rockwell,
Jr., eds., Man, Economy and Liberty: Essays in Honor of Murray N. Rothbard (Auburn, Ala.: Auburn University Press,
8. Böhm-Bawerk, Capital and Interest 346.
9. Eugen von Böhm-Bawerk, The Positive Theory of Capital, trans. William Smart (London and New York: MacMillan and
Co., 1891) 301.
10. Ibid. 361.
11. Ibid. 358.
12. Ibid. 100.
13. Ibid. 100-18.
14. Ibid. 330-1.
15. Ibid. 83.
16. Michael Perelman, Classical Political Economy: Primitive Accumulation and the Social Division of Labor (Totowa,
N.J.: Rowman & Allanheld; London: F. Pinter, 1984, c 1983) 18-9.
17. Maurice Dobb, Political Economy and Capitalism: Some Essays in Economic Tradition. 2nd rev. ed. (London:
Routledge & Kegan Paul Ltd, 1940, 1960) 154.