Polleit wrote an outstanding article about the nature of interest rates. What is truly astonishing is that some mainstream economist believe that the originary rate of interest can be non-positive. Such nonsense springs from four sources. First, all to much of mainstream economics consists of building bogus mathematical models that have little to no relation with the real world. Such model building discards how real people act in the real world. Thus the notion that people act in purposeful ways to achieve given ends is missing. When one’s thinking is so divorced from the real world, the inevitable absurdities produced by such models escape the notice of the modelers.
Also, much of mainstream economics is nothing more than schemes for social engineering administered by economist working for the state. In other words, policy goals are pronounced first, then some bogus economic rationale is constructed to justify them, usually bolstered by bogus models.
Another cause is the tyranny of aggregation. The idea that economics is captured by aggregates such as the number of housing starts, unemployment rate, etc. This is of course nonsense. As generations of Austrian school economists have repeatedly pointed out since Carl Menger’s pioneering work, economics is the result of how real people use means to satisfy their desired ends in the real world. This does not imply that aggregates are meaningless, only that focusing on aggregates misses what economics actually is and can lead to fallacies such as belief in a non-negative rate of originary interest.
Lastly we come to the veil of money. One of the great benefits of such imaginary economic constructs as Robinson Crusoe on his island is that we can analyze economic phenomena in the absence of money. The presence of money obscures many important economic phenomena, thus imaginary economic constructs that discard money clarify economic thinking. As Polleit reminds us in his article, originary interest is a category of human action and thus is prior to the advent of money. Polleit clearly shows that discarding the veil of money and thinking clearly about the nature of interest rates easily leads to the conclusion that the originary rate of interest can never be non-positive.
From “The “Natural Interest Rate” Is Always Positive and Cannot Be Negative“:
‘Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”
The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.‘
‘The “Originary Interest Rate” Reflects a Value Differential
The originary interest rate is expressive of a value differential, which results from so-called time-preference. The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants.
Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.
If the originary interest rate was near-zero, it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor’s planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.
The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”
Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.
For (praxeo-)logical reasons, therefore, time preference and the originary interest rate cannot fall to zero, let alone become negative. The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity.‘
The entire article can be read here.