Abstinence or Waiting Theory

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Abstinence or Waiting Theory
The Theory. Another theory of Interest is the Abstinence Theory. whereas the Productivity Theory. tries to explain interest from tl 1e side of demand; the Abstinence, e Theory approaches the problem from the side of supply. It was ; Senior who first pointed out that saving involved a sacrifice or “abstinence” as he put it. Saving was an act of abstaining from consumption. Since to abstain was painful, it was necessary to reward people for this act. This reward was in the form of the interest paid to those who saved. rather than consumed their incomes, or a part of their income. C •.itidslIJ. The idea of abstinence was widely criticised on the ground thal it suggested positive discomfort. while the rich people. who are the main source of capital, save without the least inconvenience. That s why Marshall substituted the term “waiting” for  “abstinence”. Saving implies waiting. When a person saves, he does not refrain from consumption for all time; he merely postpones present consumption to a future data. Meanwhile, he has to wait. But since most people do not like to wait, an inducement is necessary to encourage this postponement of consumption. Interest is this inducement. Some “waiting”, however, may be forthcoming without any inducement in the way of interest payment. Other people will “wait” even with a negative rate of interest. But aggregate of savings thus made will not be adequate to meet the total demand for capital. Interest must be paid to induce many more people to save in the case of whom “waiting” does involve inconvenience. The rate of interest must be high enough to bring forth the marginal increment of saving or “waiting” in order to meet the aggregate demand for capital. The rate of interest will be fixed at a level at which the supply of “waiting” will be equal to  the demand for it.  This theory has a considerable element of truth in it, but it does not clearly analyse forces acting on the side of demand for capital Austrian or Agio Theory This theory is also called Psychological Theory of interest. First advanced by J Rae in 1834, this theory was given its final shape by 80hm Bawerk or the Austrian school of economists. It became popular later among some American economists, like Fisher, with slight modific. The Theory. The gisl of the theory of Bohm Bawerk. is that interest arises because people prefer present goods to future goods, and that, therefore, there is an ‘agio’ or premium on ~t goods. One bird in haod is said to be worth two in the bush. The present gratification is attached greater importance than the future satisfaction. In other words, future satisfactions when viewed from the present angle undergoes a discount. Interest who first pointed out that saving involved a sacrifice or “abstinence” as he put it. Saving was an act of abstaining from consumption. Since to abstain was painful, it was necessary to reward people for this act. This reward was in the form of the interest paid to those who saved. rather than consumed their incomes, or a part of their income. . The idea of abstinence was widely on the ground that it suggested positive discomfort. while the rich people. who are the main source of capital, save without the least inconvenience. That is why Marshall substituted the term “waiting” for “abstinence”. Saving implies waiting. When a person saves, he does not refrain from consumption for all time; he merely postpones present consumption to a future data. Meanwhile, he has to wait. But since most people do not like to wait, an inducement is necessary to encourage this postponement of consumption. Interest is this inducement. Some “waiting”, however, may be forthcoming without any inducement in the way of interest payment. Other people will “wait” even with a negative rate of interest. But aggregate of savings thus made will not be adequate to meet the total demand for capital. Interest must be paid to induce many more people to save in the case of whom “waiting” does involve inconvenience. The rate of interest must be high enough to bring forth the marginal increment of saving or “waiting” in order to meet the aggregate demand for capital. The rate of interest will be fixed at a level at which the supply of “waiting” will be equal to . the demand for it. This theory has a considerable element of truth in it, but it does not clearly analyse forces acting on the side of demand for capital Austrian or Agio Theory This theory is also called Psychological Theory of interest. First advanced by J Rae in 1834, this theory was given its final shape by 80hm Bawerk or the Austrian school of economists. It became popular later among some American economists, like Fisher, with slight modifies. The Theory. The gisl of the theory of Bohm Bawerk. is that interest arises because people prefer present goods to future goods, and that, therefore, there is an ‘agio’ or premium on ~t goods. One bird in haod is said to be worth two in the bush. The present gratification is attached greater importance than the future satisfaction. In other words, future satisfactions when viewed from the present angle undergoes a discount. Interest

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Abstinence or Waiting Theory