According to most commentators, artificially lowering interest rates by the central bank prompts businesses to increase investments in capital goods and the structure of production (e.g., tools, machinery, infrastructure). This is supposed to increase economic growth. In short, artificially lowering interest rates equals economic growth. But does it make any sense?
Individual Time Preferences and Interest Rates
According to thinkers such as Carl Menger and Ludwig von Mises, interest is the outcome of the fact that individuals assign a greater importance to present goods than to identical goods in the future. The higher valuation is not the result of capricious behavior, but because life in the future is not possible without sustaining it first in the present. Menger wrote:
Frank Shostak
Author
Frank Shostak, Ph.D., is an associated scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.
