The Consumption-Theory of Time Preference Integrates the Theory of Capital and Interest into the General Theory of Prices

Let us highlight the significance of this explanation within the overall theoretical framework of Misesian economics. Consumption here appears as the root of all economic phenomena. Carl Menger and his disciples had argued that consumer choices directly determine the prices of consumers’ goods, and that indirectly they also determine the prices of producers’ goods. Now time preference, too, and with it the phenomena of capital and interest appear to be rooted in consumption. The great attraction of this explanation (at least from Mises’s point of view) was that it did not stress any psychological dispositions of man, but relied on the fundamental fact that there can be no human action without consumption. The consumption-theory of time preference thus seamlessly integrates the theory of capital and interest into the general theory of prices. In the field of interest—as in the broader market process—the consumer is sovereign.

—Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 779.

Time Preference Is Only the Proximate Cause of Interest; the Ultimate Cause Was the Necessity of Consumption

Like Böhm-Bawerk, Mises believed that time preference was only the proximate cause of interest. But rather than seeing the ultimate cause in certain psychological dispositions of the human being, he followed Frank Fetter and Franz Cuhel in arguing that the ultimate cause was the necessity of consumption. The fact is that human beings cannot survive if they do not consume. Hence there must be some time preference in human action or the human race would perish. This does not mean that time preference is the only factor determining human actions. It means that in order to survive, human beings must at some point prefer shorter production processes to longer ones, even though the longer ones would be more physically productive.

Mises argued that one would always choose the longest production process if one could disregard the need for survival through time. It is the need to survive that prompts the acting person also to consider the passage of time and to prefer, at some point, sooner results to later ones.

—Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 778.