Critically examine the classical Theory of Interest OR Fisher’s Time Preference Theory of Interest
The Classical Theory of Interest or Real Theory of Interest seeks to explain the determination of rate of interest by real factors like productivity and thrift i.e. productivity of capital goods and saving of goods. According to this theory the rate of interest is payment for savings. The rate of interest in this theory is determined by demand for savings to invest in capital goods and the supply of savings. Let us explain there demand and supply side. Demand for Savings: The demand for capital goods comes from firms which desire to invest, that are to purchase or to make new capital goods. Capital goods are demanded because they have a revenue productivity like all other factors. For any given type of capital assets e.g. a machine, it is possible to draw marginal revenue productivity curve showing the addition made to the total revenue by additional unit of machine at various levels of stock of that machine. We have said that capital like other factors of production has margin...