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Critique of Austrian Economics

Part II:  The Legacy of Ludwig von Mises 

Section XII:  The Originary Rate of Interest

Mises (1966, p. 524, italics added) writes:

As the consumers’ goods are present goods, while the factors of production are means for the production of future goods, and as present goods are valued higher than future goods of the same kind and quality, the sum thus apportioned, even in the imaginary construction of the evenly rotating economy, falls behind the present price of the consumers’ goods concerned.  This difference is the originary interest.

Difference?  Interest is a ratio.  In any case, one cannot compare an apportioned sum with a price since they have different units.  Skousen estimates that the revenue from the sale of capital goods is 56% greater than that from consumer goods (1990, p. 191).  There is no direct connection between this ratio and the interest rate.  If Mises is comparing the average prices of consumers’ and producers’ goods, does this not conflict with his criticism of price indexes?  But even assuming that the PPI and the CPI are meaningful statistics, the same criticism of Garrison (See Section VI) now also applies to Mises.  There is a complicated structure of complementary capital goods and labor applied at different points in time.  A particular machine lasts a long time and makes partial contributions to the production of a variety of goods.  So exactly what prices are being compared?  Just as Garrison was ignoring capital, now Mises is ignoring labor.

Keynes (1953, pp. 192-193) also criticized Mises’ theory of interest:

A peculiar theory of the rate of interest has been propounded by Professor von Mises and adopted from him by Professor Hayek... namely, that changes in the rate of interest can be identified with changes in the relative price levels of consumption-goods and capital-goods (Mises 1971, p. 339 et passim, particularly p. 363)....  By a somewhat drastic simplification the marginal efficiency of capital is taken as measured by the ratio of the supply price of new consumers’ goods to the supply price of new producers’ goods.  This is then identified with the rate of interest.

Here, Keynes is writing in his 1936 General Theory about Mises’ 1912 Theory of Money and Credit, which had been translated into English in 1934.  In spite of Mises’ vitriolic criticisms of “Lord Keynes,” when the ball was back in his court, he did not reply to this criticism in his 1949 Human Action.  Chapter XIX of Human Action, titled “Interest,” (Mises 1966, pp. 524-537) is surprisingly short and devoid of any mention of a controversy.

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