Productivity and Time Preference Are Highly Important But Have Very Different Functions

In journal articles on capital, interest and rent written largely between 1900 and 1914 (Fetter 1977), and particularly in two treatises on economic principles (Fetter 1904, 1915), Fetter built upon Böhm-Bawerk and the Austrian School to develop a lucid and remarkable integrated structure of economic theory. He was able to accomplish this feat by purging economics of all traces of Ricardian or other British objectivist theories of value and distribution, in particular any differential theories of rent or productivity theories of interest.

Much of Fetter’s achievement rested on his insight into the ordinary language meaning of ‘rent’ as simply the price of any durable good per unit time. He was then able to show that the prices of consumer goods are determined by their marginal utilities, and that these values are imputed back to determining the rental prices of factors of production by their marginal value productivity in serving consumers. The capital value, or price of the whole good (whether land, capital goods, or, Fetter might have added, the labourer under slavery) is then determined by the sum of its expected future returns, or rents, discounted by the social rate of time preference, or rate of interest. Thus, Fetter went beyond Böhm-Bawerk by arriving at a pure time preference theory of interest. Productivity and time preference are both highly important, but they have very different functions: the former in determining rents, and the latter determining the rate of interest. Thus, future rents are discounted by the rate of time preference and summed up, or ‘capitalized’, into their present capital value. Indeed, Fetter often called his contribution the ‘capitalization theory of interest’.

—Murray N. Rothbard, “Frank Albert Fetter (1863-1949),” in The New Palgrave Dictionary of Economics, 3rd ed. (London, UK: Palgrave Macmillan, 2018), 4540.