Interest Rates and Uncertainty
An Economics Reading List
Interest Rates and Uncertainty
Bagehot, Walter, Lombard Street
Bentham, Jeremy, Defence of Usury
Böhm-Bawerk, Eugen V., Capital and Interest
- “The loan is a real exchange of present goods against future goods.” With this much-quoted summary from this path-breaking 1890 book, Eugen von Böhm-Bawerk cut through a morass of previous flawed interest-rate theories to give us the definition used in every economics classroom today.
In this first of his series of two books on capital and interest rates, Böhm-Bawerk exactingly critiques existing theories of interest rates, highlighting how spare the serious thought given to them by personages as respected as Smith, Ricardo, Turgot, Say, Bastiat, Senior, and later economists who relied on them; and how halting the subsequent historical developments. The chapter-by-chapter critiques are sometimes so embarrassing to economists that they seem pedantic, yet the end result is undeniable: it is easy to claim glib understanding of interest rates, but hard actually to explain them.
Not only does this work lead the way to the modern understanding of interest rates, but it also provided some scathing critiques of late 19th-century Socialism. Böhm-Bawerk’s chapter on Rodbertus simultaneously shows the holes in the some of theories of capital and interest at the foundation of Socialism, while developing the use of discounted present value in language clear enough for today’s college classrooms. Hints of academic developments later accepted generally by economists, such as a nice description of the stream of services given off by capital goods in Book III, Chapter V, real business cycle theory, and intertemporal trade appear in scattered sentences throughout.
Böhm-Bawerk’s focus on the importance of clear thinking about interest rates, the capital investment process, and intertemporal dynamics; his stylistic bridging of the period when mathematics and logical attention to detail were clearly beneficial but only at the verge of introducing into a textbook; and his implicit vision of a macroeconomics dealing with the aggregate as opposed to the microeconomics of the individual, changed economics forever.
Fama, Eugene, Foundations of Finance
Fama, Eugene, and Miller, Merton, The Theory of Finance
Fisher, Irving, The Theory of Interest
Hume, David, “Of Interest,” from Essays, Moral, Political, and Literary
Knight, Frank, Risk, Uncertainty, and Profit
Mackay, Charles, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds
Wicksell, Knut, The Influence of the Rate of Interest on Prices
Can a forced reduction in the nominal rate of interest cause an increase in the price level; and if so, how does that square with the observation that inflations are empirically accompanied by high interest rates? Wicksell’s 1906 lecture, presented before the existence of the Federal Reserve or international monetary coordination, was one of the first expositions of a Central Bank’s potential ability, via interest rate policy alone, to affect the price level. Wicksell’s thoughtful analysis remains influential today.