Theories of Interest Based on Productivity Are a Remnant of the Objectivist Conception of Value

Böhm-Bawerk also considers theories which, like Clark’s, base interest on the marginal productivity of capital to be untenable. In fact, according to Böhm-Bawerk, theorists who claim that interest is determined by the marginal productivity of capital are unable to explain, among other points, why competition among the different entrepreneurs does not tend to cause the present value of capital goods in the market to match that of their expected output, thus eliminating any value differential between costs and output throughout the production period. As Böhm-Bawerk correctly indicates, the theories based on productivity are merely a remnant of the objectivist conception of value, according to which value is determined by the historical cost incurred in the production processes of different goods and services. However prices determine costs, not vice versa, and knowledge of this fact reaches at least as far back as Luis Saravia de la Calle. Economic agents incur costs because they believe that the value they will be able to obtain from the consumer goods they produce will exceed these costs. The same principle applies to each capital good’s marginal productivity, which is ultimately determined by the future value of the consumer goods and services the capital good helps to produce. By a discount process this value yields the present market value of the capital good (which is completely unrelated to its cost of production).

—Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity (Cheltenham, UK: Edward Elgar, 2008), 56-57.