The Rate of Interest Is NOT Set in the Loan Market; Interest Is a General Phenomenon Pervading All Sectors of the Market

Another possible objection to Mises’s treatment of interest is that it focuses on real goods rather than money. After all, isn't interest related to how much the lender charges on a loan of money? Why isn't the interest rate simply the price that balances the supply and demand for loanable funds?

Here the answer is that Mises, following Böhm-Bawerk, views interest as a general phenomenon that pervades all sectors of the market. From this perspective, it’s not the case that the rate of interest is “set” in the loan market, and then ripples out to other markets where people adjust their behavior based on the interest rate. On the contrary, in a market free from outside interference, individuals’ subjective time preferences manifest themselves in every market. Time preference influences the supply and demand in the loanable funds market, but time preference also regulates how much a home builder will pay today for the lumber, shingles, nails, and so on that will yield a house to be sold in a year’s time. The implied rate of return on a production project—in other words, the percentage excess of the total revenues compared to the total monetary expenses—is called originary interest. Originary interest is ultimately determined by subjective time preference because it reflects the fundamental difference in valuation between present and future goods.

—Robert P. Murphy, Choice: Cooperation, Enterprise, and Human Action (Oakland, CA: Independent Institute, 2015), e-book.