The Human Action Podcast Interest Is Not the Marginal Product of Capital
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Nov 23, 2025 Dive into the intriguing world of capital and interest theory, where traditional notions collide with Austrian views. Discover why the common equation of interest and marginal product of capital only holds in overly simplified models. Explore the nuances of time preference and how it shapes economic debates. Bob offers compelling arguments, including an insightful farmer-tractor example, revealing that raw productivity alone can't explain interest rates. The discussion also introduces an innovative two-good model, reshaping your understanding of economic interactions.
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One-Good Assumption Drives The MPK Claim
- Mainstream models that equate interest with capital's marginal product rely on a one-good assumption that collapses distinct economic concepts into one variable.
- Bob Murphy shows this assumption drives the textbook result and misleads about the true source of interest.
Productivity Explains Price, Not Interest
- Böhm-Bawerk argued that capital's physical productivity explains its price, not why buyers earn a positive net return over time.
- The mystery is why present purchase prices are lower than the discounted future flow, not why capital is productive.
Fisher's Sheep Example Simplifies Too Much
- Irving Fisher's sheep example collapses consumption and capital into one good to make math simple and intuitive.
- Murphy uses this to show why the simplification yields the misleading result interest equals marginal product of capital.