The True Function of a Positive Rate of Interest Is to Act As an Intertemporal Brake

³Larry Moss has directed my attention to a passage in Mark Blaug’s Economic Theory in Retrospect (1985 [1962]) in which Blaug sets out Böhm-Bawerk’s theory of capital and interest using the “brake” metaphor: “The true function of a positive rate of interest then is to act as a brake on the tendency to neglect present wants by overextending the period of production” (p. 505). The Austrian interest rate as an intertemporal brake stands in sharp contrast to the neoclassical interest rate as a reflection of capital’s productivity. What the interest rate actually reflects, according to the Austrians, is people’s reluctance to forgo enough current consumption to take the fullest advantage of time-consuming production processes.

—Roger W. Garrison, “From Keynes to Hayek: The Marvel of Thriving Macroeconomies,” Review of Austrian Economics 19, no. 1 (March 2006): 11n.