3.3 — Capital & Interest Theory — Readings

Monday, October 19, 2020

Required Readings:

• Skim Irving Fisher, Eugen von Böhm-Bawerk, (optional: Wicksell) and their readings in Reader
• Finish Ch.9 “The Transition to Neoclassical Economics: Marginal Analysis Extended” in Landreth & Colander
• Ch.11 “Marginal productivity and factor prices” in Blaug

Recommended Readings:

• Knight, Frank, 1921, Risk, Uncertainty, and Profit

The following Wikipedia entries can also provide more background:

• Eugen von Böhm-Bawerk
• Frank Knight
• Irving Fisher
• Fisher hypothesis
• Intertemporal choice
• Interest
• Interest rate
• Quantity Theory of Money
• Knut Wicksell
• Cumulative process

Questions to Help Your Reading

On Profit and Uncertainty

• Is entrepreneurship a fourth factor of production that is paid its marginal product?

• In what way is pure profit a “residual”?

• What is the difference between “risk” and “uncertainty” according to Knight?

• How is profit related to uncertainty?

• What are the main differences between the theory of (perfect) competition, and actual competition in the real world? How is this tied in with uncertainty, and with profit?

On Interest

• What are Böhm-Bawerk’s three reasons for a positive rate of interest?

• What is “roundaboutness” in production? Why is it more productive, according to Böhm-Bawerk?

• What is “time preference”?

• How does Fisher conceive of interest as it relates to income, and capitalized values?

• What is the quantity theory of money, and Fisher’s equation of exchange? What are the main takeaways?

• What is the difference between the “natural rate” and the “market rate” of interest, according to Wicksell? Explain Wicksell’s “cumulative process” that results if the two are different.