Volume 10, No. 1 (Spring 2007)
Time preference, one of the fundamental concepts of economics, is the ratio between the present values of present and future goods. Mises (1949) holds that time preference is the only reason interest is paid on loans, calling the pure time preference component originary interest. Empirically observable interest rates also include an entrepreneurial component, reflecting a subjective assessment of the uncertainty of repayment, and a price premium component, reflecting anticipated future changes in the values of the goods in which repayment is to be made, including loss of purchasing power of the monetary unit. Interestingly, the price premium component of the interest rate can be negative.
