“The willingness of the firm’s owners to pay a fixed-interest return to lenders is, of course, a function of their anticipated profit in selling the product to the consumers. Willingness to pay interest will always be less than or equal to the anticipated profit rate; and in the long-run general-equilibrium world of changeless certainty—a world that has never and can never come into existence—the rate of return would be equal throughout the market economy. In that world, the rate of profit in every firm would be equal to the rate of interest on loans.” (Rothbard 2011: 451).This is very much a version of the Wicksellian monetary equilibrium approach, where the “rate of return” in long-run general-equilibrium is equal to one version of Wicksell’s natural rate, and in turn the rate of return on capital is equal to the rate of interest.
Rothbard notes that only in “long-run general-equilibrium” can the rate of return be uniform: consequently it follows from this that only in such an equilibrium can there be a single natural rate.
Yet, despite this, Rothbard just blathers on about the single “natural rate” when he discusses the Austrian business cycle theory (ABCT) (Rothbard 2009: 794, 1003–1004), and sees no contradiction when he bases the whole ABCT on the idea of central banks and credit expansion driving the money rate below the single natural rate. If nothing else, this proves how incoherent and intellectually incompetent Rothbard’s version of the ABCT was, just as the earlier versions of Hayek and Mises.
At one point Rothbard (2009: 1003, 112) even claims his version of the “natural rate” is different from Wicksell’s, but he seems ignorant of the fact that Wicksell had two definitions of the “natural rate,” and Wicksell did sometimes define it as the “expected yield on the newly created capital” (Wicksell 1935: 192–193) or the long-run “profit on capital” (Wicksell 1907: 214).
“Another Example of Wicksell’s Second Definition of the Natural Rate of Interest,” October 8, 2014.
“How did Wicksell, the early Austrians and Keynes define the Natural Rate of Interest?,” October 4, 2014.
Rothbard, M. N. 2009. Man, Economy, and State with Power and Market: The Scholar’s Edition (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.
Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.
Wicksell, K. 1907. “The Influence of the Rate of Interest on Prices,” The Economic Journal 17.66: 213–220.
Wicksell, K. 1935. Lectures on Political Economy. Volume 2: Money (trans. E. Classen). Routledge & Kegan Paul, London.