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Dangers of the One-Good Model: Böhm-Bawerk's Critique of the “Naïve Productivity Theory of Interest”

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  • Murphy, Robert P.

Abstract

In the late nineteenth century, Eugen von Böhm-Bawerk's magisterial work (1881) or capital and interest provided the foundation upon which virtually all modern theories are built. In his first volume, History and Critique of Interest Theories, Böhm-Bawerk classified and (in his mind) refuted all previous explanations. Böhm-Bawerk thought a proper theory of interest must explain the apparent undervaluation of future goods For example, if a machine is expected to yield annual rents of $1,000 for ten years why does it sell now for less than $10,000? To answer this question was to provide a theory of interest, for only with such an undervaluation would it be possible for a capitalist to invest in machines, for example, and reap a flow of returns, over time greater than his initial investment.

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  • Murphy, Robert P., 2005. "Dangers of the One-Good Model: Böhm-Bawerk's Critique of the “Naïve Productivity Theory of Interest”," Journal of the History of Economic Thought, Cambridge University Press, vol. 27(4), pages 375-382, December.
    • Handle: RePEc:cup:jhisec:v:27:y:2005:i:04:p:375-382_00
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