Rothmus Releases New Short Explaining Rothbardian Theory of Interest

A new short video titled "The Rothbardian Theory of Interest (Short)" has been released by content creator Rothmus, as announced via their social media platform X (formerly Twitter). The video, now available on YouTube, delves into a core concept of the Austrian School of economics, developed by economist Murray Rothbard.

Rothmus stated in the tweet, "I'm going to start posting my YouTube videos here. First one is a short on the history of the Rothbardian theory of interest." The accompanying video aims to provide a concise explanation of this complex economic idea.

The Rothbardian theory of interest posits that interest is a natural and universal manifestation of human time preference, rather than a monetary phenomenon or a result of exploitation. Time preference refers to the inherent tendency for individuals to prefer present goods and satisfaction over future goods and satisfaction, assuming all other factors are equal. This preference necessitates compensation for delaying consumption or lending resources, which is the essence of interest.

Murray Rothbard distinguished between two types of interest: originary interest and catallactic interest. Originary interest is the pure rate derived solely from time preference, representing the fundamental discount of future goods compared to present goods. Catallactic interest, conversely, is the observable market interest rate, influenced by originary interest alongside factors such as the supply and demand for loanable funds, capital productivity, and investment risk. In a free market, catallactic interest is expected to align with originary interest, adjusted for these real-world variables.

The implications of this theory are significant within Austrian economics. It asserts that interest is a legitimate and necessary component of a functioning market economy, reflecting voluntary exchanges and individual preferences. Furthermore, the theory underscores the vital role of savings and investment in fostering economic growth, as saving frees up resources for capital formation, ultimately leading to increased future productivity. Rothbard's framework also suggests that government interventions, such as central bank monetary policies or usury laws, can distort natural interest rates, potentially leading to misallocation of resources and economic instability.