Capital and interest theories - Chapter 3

American Journal of Economics and Sociology, The,  Dec, 2002  

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It is true that doubling the productivity of the world's capital would not be entirely without effect upon the rate of interest; but this would not be in the simple ratio supposed. Indeed, an increase in the productivity of capital would probably result in a decrease, instead of an increase, of the rate of interest. (8)

He added that the value of capital would be at least doubled. For Seager, this result was unimaginable, and he argued as before that

time being allowed for an adjustment to the new conditions, the values of produced means to further production will be brought into conformity to the expense of producing them. (9)

Thus for Seager, some large increase in the interest rate, if not a doubling, was inevitable. In Fisher's reply to Seager, he expanded his argument by considering effects upon the prices of capital's products and the costs of producing capital. He maintained that product prices should fall while costs should rise, thereby mitigating a substantial rise in the return to capital. Further, the ultimate effect would be a lowering of the interest rate as the lower rates of impatience to which interest rates must eventually adjust. (10) Seager was unconvinced by Fisher's rebuttal and replied: "He fails to comprehend clearly the way in which productivity and time discount operate in the determination of the current rate of interest in any given time period." (11)

Brown's Intervention

BROWN, THEN FISHER'S COLLEAGUE AT YALE, was similarly unconvinced. He had been cited, along with a fellow student of Fisher's, J. H. Parmelee, "for valuable aid in proof-reading, including many keen and fruitful suggestions" in the Preface to The Rate of Interest. (12) Brown wrote an article in 1913 titled "The Marginal Productivity Versus the Impatience Theory of Interest." (13) The article was clearly inspired by that of Seager and was supportive, in part, of Seager's objections. Brown's stated position and the attempt of the paper was to show

that productivity and impatience are coordinate determinants, i.e., that productivity is as direct a determinant as is impatience, and that productivity may be, in a modern community, the more important determinant. (14)

Brown stated in several instances that he was an earlier adherent of "time preference" theories of interest; thus, Seager's paper may have been influential in an uncharacteristic change in opinion by Brown.

Brown's dissent from Fisher's theory rested on the observation that Fisher failed to admit that productivity had a direct rather than an indirect influence on the rate of interest through its effect on impatience rates. Brown acknowledged that the productivity of waiting (15) could in Cassel's terms affect the individual rates of impatience and thus interest rates but wished to establish that the productivity of waiting could directly influence these rates. Here Brown was facing the problem with which Bohm-Bawerk and others had struggled. In addition, Brown would have to meet Fisher's refutation of Bohm-Bawerk's arguments.