Frank Albert Fetter

Frank A. Fetter studied at Indiana University and Cornell University, and received his doctorate in 1894 at the University of Halle. He spent the greater part of his life teaching at Cornell University (1901-1911) and at Princeton University (1911-1934). In scholarly articles on capital, interest and rent, and above all in his two treatises on economic principles (Fetter, 1904 and 1915), Fetter built an exceptionally integrated theoretical framework on the basis of Eugen von Böhm-Bawerk and the Austrian School. He achieved this by purging economics of all traces of Ricardian and other British objectivist theories of value and distribution, in particular of any theory of differential rent and any productivity theory of interest. A large part of his achievement rested on the everyday understanding of rent as the price of a durable good per unit of time. He succeeded in showing that the prices of consumer goods are determined by their marginal utility, and that these values determine the rental prices of the factors of production through imputation. The capital value, or price, of a durable good (land, capital goods, and so on) is thus determined by the sum of the expected future rents, discounted at the social rate of time preference, that is, at the rate of interest. By setting out a pure time preference theory of interest, Fetter went beyond Böhm-Bawerk. Both productivity and time preference are of extraordinary importance, yet they have wholly different economic functions: the former determines the rental prices of a factor, the latter determines interest rates. Future rents are summed, or "capitalized" into their present capital value. Fetter himself often called his theory the "capitalization theory of interest". Fetter gave the best account so far of the time market, the market for present goods in exchange for future goods, which pervades the entire economic system. The time market includes not only the credit markets; it also exists in the form of all those markets in which entrepreneurs use money to acquire the discounted factors of production and generate a time income, that is, an interest income. Entrepreneurs earn profits by steering the economy towards a never attainable general equilibrium, which is determined by the marginal utility, marginal productivity and time preferences of all market participants. Driven by his capitalization theory, Fetter independently set out a Misesian business cycle theory (Fetter, 1977, 260-316). In the last years of his life Fetter abandoned the theory of value and distribution in order to devote himself to questions of monopoly theory. The shift of his focus to monopoly theory, combined with two world wars and the continuing dominance of Alfred Marshall's neo-Ricardian theory, meant that Fetter's important contributions to economics were not incorporated to an adequate degree into the theoretical edifice of modern economics.