A Reply to Aguilar
Robert P. Murphy
Part II: The Legacy of Ludwig von Mises
Section XII: The Originary Rate of Interest
Once again Aguilar attributes rank error to an Austrian when merely a difference in word usage is involved. He first quotations Mises, who contrasts the money spent on consumers' goods versus the total amount spent on the factors that produced them. Mises concludes, "This difference is the originary interest." To this Aguilar is incredulous: "Difference? Interest is a ratio. In any case, one cannot compare an apportioned sum with a price since they have different units" (p. 30).
Now this objection is just silly. In the first place, if we are to be entirely merciless with terminology, it is Aguilar, not Mises, who is mistaken. Interest is indeed measured in money; e.g. "I earned $1000 in interest in my bank account last year." The interest rate is a ratio, namely the amount of interest divided by the principal.
Having defended Mises on this minor issue, I grant that Aguilar's more substantive criticism has some validity. Aguilar basically asks how one can derive the originary rate of interest from the vast array of prices in an actual structure of production. I too raised a similar objection in my dissertation, where I said that there is no reason for a single own-rate of substitution to arise among all goods and over all time periods outside of the evenly rotating economy. Thus the Austrian theory of interest is only sensible in the ERE; even if there were no entrepreneurial errors but the data of the market changed over time, then the pure time preference theory of interest would be inapplicable.
