Austrian Interest Rate Theory

🕐 Time Preference Foundation

Austrian economists, following Eugen von Böhm-Bawerk and Ludwig von Mises, argue that interest rates originate from time preference—the universal human tendency to value present goods more highly than future goods. This isn't merely a psychological quirk, but a fundamental aspect of human action under uncertainty.

🏗️ Capital Structure & Production

Lower interest rates signal that society is more willing to wait for future consumption, making longer, more "roundabout" production processes profitable. Higher rates indicate impatience, favoring shorter production methods.

This creates a natural coordination mechanism: when people save more (lower time preference), interest rates fall, encouraging entrepreneurs to invest in capital-intensive projects that will bear fruit in the distant future.

⚠️ The Dangers of Artificial Manipulation

When central banks artificially lower interest rates below the natural rate (determined by time preference), they send false signals to entrepreneurs. This can trigger malinvestment—resources flow into projects that appear profitable only because of the artificially cheap credit.