Sraffallacies: A Misesian Defense of ABCT (I)

This picture must be seen together with this sound

In my first completely english post I want to put in the (theoretical) arena two fighters and make them have a real Mortal Kombat. My english may not be very good, so if you don't understand any sentence (or the whole post!) please let me know so I can fix it, thanks. In the blogosphere and sometimes in academia a particular branch of keynesianism, the post-keynesians, always have a ready answer for the austrians when they both are arguing: “Sraffa refuted Austrian Business Cycle Theory”. Well, my plan is to confront Piero Sraffa’s criticism to Ludwig von Mises’ writings in order to see if that assertion is true. This is a long, theoretical and quoted post, so prepare yourself! And is about the interest rate conflict, the "second cardinal question", so the topic of "forced savings" will have to wait to another separate future post. I have divided the post in two parts: As anyone who has ever play a Mortal Kombat game will note, this post has a “Select Your Fighter” section in part I where you will see some clarifications and differences between these fighters and other people involved in the debate. After that you have three “Rounds” to see if Sraffa’s critique can defeat Mises. Then you have a “Finish Him!!” section which is an additional and ultimate round. After that comes second part with a “Fatality” section in which there are other author’s criticism to Sraffa and defenses of austrian theory. After that you have a “Brutality” section which deals with some additional criticism from an anti-austrian blogger. And finally you have a “Friendship” section with my conclusion. The conclusion is that the Italian was unable to and was far from “refuting” Austrian Business Cycle Theory.

Select Your Fighter: 

This is a Mises vs Sraffa fight, do not involve Hayek on this. All fighters are not the same, they have differences.

Mises was not Hayek: This post is a misesian defense of Austrian Business Cycle Theory (ABCT). Sraffa’s two 1932 articles were targeting Hayek’s interpretation of Mises’s theory. As Hayek was not Mises and Mises was not Hayek, the ABCT cannot be “refuted” by criticizing only one interpretation. The master of ABCT in my view was Mises, and it is presented in its definitive form in his book Human Action, so in order to beat the theory one must beat him. As I will show, Sraffa was far from doing that. Despite the fact I consider Hayek’s response enough to answer the italian and I will cite Friedrich in some moments, I will try to concentrate only on Mises, my interpretation of Hayek’s refutation of Sraffa’s critique will have to wait. That’s the reason for the Mortal Kombat vs screen image :P .
 
Mises was not Wicksell: Does Mises completely support Wicksell’s theory of “natural rate”? Or does Mises support just the part about the deviation and distinction of some non-manipulated (by banks) rate?

In the second german edition of his The Theory of Money and Credit (TMC) Mises makes this clarification when he writes about interest[1]:

"The fact that I have followed the terminology and method of attack of Böhm-Bawerk's theory of interest throughout this chapter does not imply that I am an adherent of that theory or am able to regard it as a satisfactory solution of the problem. But the present work does not afford scope for the exposition of my own views on the problem of interest; that must be reserved for a special study, which I hope will appear in the not-too-distant future. In such circumstances I have had no alternative but to develop my argument on the basis of Böhm-Bawerk's theory. Böhm-Bawerk's great achievement is the foundation of the work of all those who until now have dealt with the problem of interest since his time, and may well be the foundation of the work of those who will do so in the future. He was the first to clear the way that leads to understanding of the problem; he was the first to make it possible systematically to relate the problem of interest to that of the value of money."[2]

This passage demonstrates that Mises did not fully endorses Bawerk’s theory of interest, or what we may call his “natural rate” theory. Not only Bawerk’s, as his later works will show he also may have not completely approved Wicksell’s natural (unique-barter-maintain price level) rate. However he had neither space nor time to write about his own theories despite the fact that, as that footnote demonstrates, he already had ideas in his head:

"I had already begun writing my theory of direct exchange, and would have included it in the first volume along with the theory of indirect exchange had I been able to take my time and work in peace. But I knew that we were standing on the eve of a great war, and there was not much time available to me. I wanted to complete my book before the war’s outbreak. Thus I made the decision to go beyond the narrow structure of monetary theory by a few points only, postponing a more comprehensive work. I believe the task was done justice."[3]

Unfortunately his “special study, which he hopes will appear in the not-too-distant future” actually did appear in a very distant one. We had to wait until 1940 in Nationalökonomie in order for him to develop his own views, and later in HumanAction (1949):

"In Nationalökonomie, Mises finally delved into interest theory, the primary research area of his revered teacher, Böhm-Bawerk. In his classes at the University of Vienna in the 1920s, Mises had frequently dealt with contemporary interest theories. In those years, he had also planned to write a paper on the subject, but there had always been other projects that seemed more important. In Geneva, he was finally at leisure to fill this gap."[4]

As Festré says:

"Mises’ conception of the rate of interest has changed over time alongwith his treatment of capital. In his early Theory of Money and Credit, Mises’ stance at the rate of interest directly originates from Wicksell. He likewise distinguishes between the monetary (loan) rate of interest and the natural rate of interest. The former is determined on the loan market. But the quasi-infinite elasticity of the supply of fiduciary media by banks makes it possible even an extremely low loan rate of interest (Mises 1981 [1924], p. 346). As for the natural rate of interest it is defined in Böhm-Bawerkian terms… In his later Human Action, Mises uses the term ‘originary’ rate of interest, defined as the discount of future as against present goods. Now, the phenomenon of interest directly relates to time preference, with no more reference to Böhm-Bawerk’s natural rate of interest… However, in Human Action, when Mises switches from Böhm-Bawerk’s notion of natural rate of interest to the concept of originary rate of interest reflecting time preference, it is not clear whether there should exist a definite equilibrium level of the market rate of interest…" (Italics and bold added)[5]

As we see the fact that Mises used Bawerk’s terminology does not mean that Mises agreed with it. Well, in the same way the fact that Mises used Wicksell’s natural rate does not mean that he agreed with his interest theory. 

Why did Mises use theories of others even when he did not fully agree with them? It must be obvious at this moment: If Mises had not left his own interest theory written (yet), he could not refer to it in his treatment of the issue. In order to be comprehended, he had to refer to something that already existed in the moment. What he had in that moment was the theory that money market rate of interest can deviate from the “natural (barter)” rate, i.e. Wicksellian theory (based on Bawerk’s one). In other words Mises accepted (and demonstrated) that market rate can be deviated by interference of banks, he accepted the deviation part of Wicksell’s theory and that there must be a distinction between them because one rate can be manipulated. But, as his later writings demonstrate (when he finally had the time to write about the issue), he did not accepted that the “natural rate” was either a barter rate or a unique rate in the real world or a neutral rate as a reading of Wicksell may suggest. Mises agreed with this divergence and distinction between a manipulated (by banks) rate and the non-manipulated rate (a divergence produced by the non-neutrality nature of money he had developed), but he disagree with the interest from which market rate deviates by intervention of banks.

"In Wieserian fashion, Wicksell defined the natural rate of interest as the rate that would come into existence under the sole influence of real (nonmonetary) factors; see Wicksell, Geldzins und Güterpreise, pp. iii, 93ff. He also defined it as the rate at which the price level would remain constant (see ibid., p. 92). Both distinctions led to great confusion among later theorists, but Mises’s business cycle theory seemed to show that it was useful to make some such distinction." (Italics and bold added)[6]

Now, some readers will tell me that in 1928 Mises wrote:

"The banks can, therefore, undercut the interest rates which would otherwise appear on the loan market, in the absence of their intervention. Since competition from them compels other money lenders to lower their interest charges, the market interest rate must therefore decline. But can this reduction be maintained? That is the problem. …In conformity with Wicksell’s terminology, we shall use “natural interest rate” to describe that interest rate which would be established by supply and demand if real goods were loaned in natura[directly, as in barter] without the intermediary of money. “Money rate of interest” will be used for that interest rate asked on loans made in money or money substitutes." (Italics and bold added)[7]

Mises used Wicksell’s distinction between rates and defines “natural rate” using Wicksell’s terminology (not his own): “in natura” (Note that, once again, the word “terminology” makes appearance as in the Bawerk’s case). But this does not necessarily mean he agreed with it, the fact that he clearly clarifies that he is using Wicksell’s terminology demonstrate that he want to be distinguished from him. Using his previous footnote, the one in which he writes referring to Böhm-Bawerk, he could have written: “The fact that I have followed the terminology and method of attack of Wicksell's theory of interest throughout this chapter does not imply that I am an adherent of that theory or am able to regard it as a satisfactory solution of the problem.” I want to call attention to the possibility that the same thing that happened to him with Bawerk, may had happened again with Wicksell: despite not been in full agree, he was “forced” by circumstances to write relaying on his theory. He was using Wicksell's terminology, not his own theory. 

Festré shows some distinctions on other paper:

"Although both authors varied on the definition of the ‘natural’ or real rate of interest, the bone of contention concerned the dynamics between the two rates. While Mises insisted on the interdependence of both rates, Wicksell always regarded the mutual effect on one another as non existent or, at the most, as a “secondary factor”… “Beyond variations of both authors regarding the definition of the “natural” rate of interest, Wicksell and Mises disagree on the relation between the real (or natural) rate of interest and the loan (or market) rate of interest. As Uhr indicates, for Mises, banks cannot for long maintain a loan rate lower than the natural rate of interest. If they attempt to do so, either the natural rate of interest is reduced to the level of the loan rate by real capital formation resulting from ‘real saving’, or as the price level rises, non bank creditors press for higher loan rates, and if the banks persist in maintaining the low rate against their wish, the system will spiral down toward a crises. (Mises [1924] 1981, pp. 355-65, Uhr 1960, pp. 256-57).”… “After having considered that the natural rate was independent from the monetary rate, Wicksell made this concession at the prompting of Mises’ and Davidson’s criticisms in the second Swedish edition of the Lectures (1915)"[8]

If any doubt is still left about distinction of Mises and Wicksell on interest, here is Zahringer:

"Mises did much with Wicksell’s basic concepts. In his early work (Mises, 1980 [1912]), he used Wicksell’s idea of the natural rate. However, he did not accept the capital productivity definition in any form. Rather, he defined the natural rate as “the rate determined at the time by the whole economic situation” (p. 398). Though Mises does not define the natural rate here in any further detail, it is obviously a more complex concept for him than for Wicksell. He goes on to emphasize that the productivity of capital, however defined, is not a determinant of the interest rate, but instead is a decision point for entrepreneurs as to which projects to undertake, based on the market interest rate. Later on, Mises (1998 [1949]) integrated Wicksell’s basic concept with the principle of subjective value in a time preference definition of the natural rate, which Mises called “originary interest” (p. 523). Placing his theory of interest on this firm foundation was instrumental in allowing Mises to move on to a sound concept of monetary equilibrium. Mises’s individualist conception of equilibrium stands in stark contrast to Wicksell’s reliance on broad measures of macroeconomic aggregates." (Italics added)[9]

And Huerta de Soto:

"Nevertheless Wicksell’s analysis is much inferior to Mises’s, particularly because it rests almost exclusively on changes in the general price level, rather than on variations in relative prices in the capital goods structure, which is the essence of our theory"[10]

Sraffa was not Fisher: Henry Hazlitt, criticizing Keynes’s “own-rates” theory of interest, has pointed out[11] that Fisher in 1930 wrote what Sraffa used against Hayek two years later (Hazlitt of course was attacking Keynes, not Sraffa):

"We thus need to distinguish between interest expressed in terms of money and interest expressed in terms of other goods. But no two forms of goods can be expected to maintain an absolutely constant price ratio toward each other. There are, therefore, theoretically just as many rates of interest expressed in terms of goods as there are kinds of goods diverging from one another in value."[12]

JP Koning takes this theory of Fisher back to a date long before 1930. In 1896 Fisher wrote:

"There are therefore just as many rates of interest on capital as there are forms of capital diverging in value. Even if we could find an ideal index number for capital in general or for commodities, there are other kinds of interest which might also claim the title of " real " ; we refer to " labor" and "income" interest." (Italics added)[13]

Like Adarkar noted it:

"Adarkar examines carefully Sraffa’s critique of Hayek and recognises a (superficial) similarity between Fisher’s ‘real’ rates of interest on commodities and Sraffa’s ‘commodity’ rates, but concludes that the latter is the more useful concept."[14]

Keynes was not right: Keynes in The General Theory (GT) after explaining his “own-rate of interest” theory, which was based on Sraffa’s criticism of Hayek, adds this footnote:

"This relationship was first pointed out by Mr Sraffa, Economic Journal, March 1932, p.50"[15] (Italics added)

However, as we saw, this is not true. Sraffa was neither the first nor the only one who saw that relation. The creator of the “idea” of multiple rates of interest was Fisher, not Sraffa.[16] The Italian did not cite Fisher in his paper criticizing Hayek in 1932, this fact plus Keynes’s lack of knowledge and bibliography perhaps made him believe that the “neo-ricardian” was the first. I know what you keynesians are thinking right now and yes, I have read Keynes enough to know that he certainly did read Fisher’s books (he even cites his 1930’s book on interest in the GT). But then why he did not recognized the american economist on that footnote? Why he did not say “Sraffa is building on Fisher’s theory” or “the first to point out this relation was Fisher and after him Mr. Sraffa”? He has that responsibility. I think that “lack of knowledge” is a soft accusation compared to me saying that, after he read Fisher, Keynes deliberately did not cited him in order to give Sraffa’s criticism some sort of “originality”. You have only two options for Keynes’s behavior: 1) ignorance or 2) deliberate dishonesty. I am trying to be polite so I will choose option 1).

Keynes confesses publicly his lack of knowledge (for example on capital and interest theory):

"Dr. Hayek complains that I do not myself propound any satisfactory theory of capital and interest and that I do not build on any existing theory. He means by this, I take it, the theory of capital accumulation relatively to the rate of consumption and the factors which determine the natural rate of interest. This is quite true; and I agree with Dr. Hayek that a development of this theory would be highly relevant to my treatment of monetary matters and likely to throw light into dark corners." (Italics and bold added)[17]

According to Hayek he knew nothing but marshallian economics, nothing more (that’s why he had to ask Sraffa for help!!), he knew very little about nineteenth century economic history (actually he hated that era), he did not even know about english monetary literature (Thornton)! However intelligent, memorious and original he was. It should be no surprise why the austrian completely defeated him on his critique. Hazlitt also noted Keynes’s Cambridge-centric economic knowledge:

"He includes among the classical economists the pioneers and continuers of the subjective value or marginal-utility theories that represent a break with the "classical" economics. And when he writes about orthodox economics he seems to confine himself most of the time to Marshall and Pigou. He writes as if he were unaware of the great advances beyond these writers that were made, particularly in capital and interest theory, by Böhm-Bawerk, John Bates Clark, Knut Wicksell, Irving Fisher, Ludwig von Mises, and F. A. Hayek.”… “Keynes's frame of reference is strangely provincial. He seems to assume that whatever was not discovered by either Marshall or Pigou, or discussed in his little circle at Cambridge, was never thought of at all.”… “It was provincial of Keynes to treat his Cambridge teachers as representing the highest point reached by economics prior to his own emergence. After all, among his predecessors, there were Menger and Böhm-Bawerk in Austria, Walras in Switzerland, Wicksell in Sweden, John Bates Clark and Irving Fisher in America, and Jevons and Wicksteed in his own country. And among Keynes's contemporaries such figures as Mises, Hayek, Anderson, Knight and Röpke were carrying the logical rigor and unity of economics much beyond the point where Marshall had left it."[18]

I look like it was evident:

"It is evident that Keynes had difficulty in grasping Hayek’s theory, finding it incomprehensibly muddled. His discussion of Hayek’s views drifts, as he says, into a review of Prices and Production. Keynes is very blunt..."[19]

Even “sraffians” had to admit this “lack of knowledge” fact and that he was completely unable to respond Hayek’s demolition:

"Keynes tried to answer the challenge, though with little success. Like other Anglo-Saxon and American economists, he had difficulty understanding and countering Hayek because he lacked a knowledge of the main building blocks of his analysis – Paretian general equilibrium theory and Böhm-Bawerk’s theory of capital and interest. Keynes invited Sraffa, who was familiar with both intellectual traditions, to ward off Hayek’s attack." (Italics added)[20]

This admission completely reinforces what Hayek and Hazlitt have said.

Round 1:  

It was not a "barter rate"

Let’s start with this Sraffa objection:

"An essential confusion, which appears clearly from this statement, is the belief that the divergence of rates is a characteristic of a money economy: and the confusion is implied in the very terminology adopted, which identifies the ‘actual’ with the ‘money’ rate, and the ‘equilibrium’ with the ‘natural’ rate. If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any one moment as many ‘natural’ rates of interest as there are commodities, though they would not be ‘equilibrium’ rates." (Italics added)

However Mises’s theory of interest has nothing to do with a rate that could emerge from a barter economy, as Hülsmann notes:

"In his Theory of Money and Credit, Mises had based his analysis on the Wicksellian distinction between the natural rate of interest and the money rate. But this distinction was untenable in light of Mises’s work on economic calculation and on the non-neutrality of money. There is no such thing as a natural rate of interest, defined as the rate of interest that would prevail in a barter economy. And even if there were such a “natural” rate of interest, it would still be irrelevant for the analysis of a monetary economy. Money is not just a veil over a barter economy. It affects all economic relations. Prices, incomes, allocation, and social positions in an economy using money are completely different from what they would be in a society with no common medium of exchange. And so the interest rate in a monetary economy is necessarily different from what it would have been in the same economy if the market participants had decided to forgo the benefits of money. Even if one could hypothetically compare “natural” and money interest rates—which is not the case—it would not follow that intertemporal misallocations would ensue whenever the “natural” rate was higher than the money rate. In Nationalökonomie, Mises gave a new exposition of his business cycle theory. He came up with a new benchmark to identify pernicious reductions of the monetary interest rate. The relevant benchmark was no longer the Wicksellian natural rate that would exist if the economy were a barter economy. It was rather the monetary interest rate that would exist in the absence of credit expansion.”… “In Human Action he would eventually show that the relevant distinction is between the equilibrium rate of interest and the market rate. Both rates are monetary rates and can therefore coincide." (Italics and bold added)[21]

Using a “barter-benchmark” would be nonsense because in a barter economy there cannot be economic calculation that is falsified by credit expansion and there cannot be a monetary rate of interest which can be manipulated in order to start a cycle. Without money there is no canonical ABCT, but just an estimative error of the individual who is in the barter environment, so we cannot use a rate which would prevail in a barter economy. As Salerno says:

"Not only does Mises conceive the interest rate as a potential cost of holding money, he also recognizes that it is a monetary phenomenon in a real and important sense. That is, in a barter economy, where monetary calculation does not exist, it would be impossible to even conceive the difference in value between present and future goods as a unitary rate." (Italics and bold added)[22]

Cochran pays attention to a similar fact:

"For Mises and Hayek, the trade cycle theory was an attempt to integrate an understanding of a complex capital structure into a monetary exchange economy (Boettke 2001, p. 34). Austrian business cycle theory is based on intertemporal misallocation of resources. The real intertemporal pricing problem is the relationship between the prices of inputs applied at an earlier date to the prices of outputs available at a later date—the natural rate of interest in an Austrian model—and the market rate of interest in the loan market as influenced by credit creation….” “It is in the development of the trade cycle theory that Mises, and later, Hayek recognize that rational economic planning involves not only monetary calculation—“in the absence of money, there are no economic quantities and no economic calculation” (Salerno 2002, p. 2)—but more importantly the appraisal of the value of resources available in earlier periods relative to the expected prices of the relevant output available at later dates. This is the entrepreneurial function and it cannot be duplicated in the absence of a market process where prices reflect the preferences and judgments of valuing, acting individuals. As pointed out by Salerno (1993, p. 123), “The real market process is driven by an identifiable, though ever changing, class of individuals whose productive activities are guided by monetary calculation based upon perpetual forecasting of an uncertain and changing future." (Italics and bold added)[23]

Here is Mises himself:

"But one must always be aware that the assumption that economic goods are exchanged without the intermediation of a generally used means of exchange is realistic only for the cases involving the exchange of consumer goods and those producer goods of the lowest order, i.e., those closest to consumer goods. The direct exchange of consumer goods and closely related producer goods is, of course, possible; it exists today and did so in the past. However, the exchange of goods of a more remote order presupposes the use of money. The concept of the market as the essence of coordination of all elements of demand and supply, upon which modern theory does and must depend, is unthinkable without the use of money. Only with the use of money is it possible to compare the marginal utility of goods in all alternative employments. Only where money exists can we clearly analyze the difference in value between present and future goods. Only within a money economy can this value difference be comprehended in the abstract and separated from changes in the valuation of individual concrete economic goods. In a barter economy, the phenomenon of interest could never be isolated from the evaluation of future price movements of individual goods. To assume the existence of a highly developed market system without the intermediation of a generally accepted means of exchange would be a scientific fiction like Vaihinger's "as if theory”" (Italics and bold added)[24]

A barter economy is just a “fictitious” concept:

"Exchange ratios on the market are constantly subject to change. If we imagine a market where no generally accepted medium of exchange, i.e., no money, is used, it is easy to recognize how nonsensical the idea is of trying to measure the changes taking place in exchange ratios. It is only if we resort to the fiction of completely stationary exchange ratios among all commodities, other than money, and then compare these other commodities with money, that we can envisage exchange relationships between money and each of the other individual exchange commodities changing uniformly. Only then can we speak of a uniform increase or decrease in the monetary price of all commodities and of a uniform rise or fall of the “price level.” Still, we must not forget that this concept is pure fiction, what Vaihinger termed an “as if.” It is a deliberate imaginary construction, indispensable for scientific thinking." (Italics added)[25]

It must be clear that in money economy there cannot be a barter determined rate of interest because a world with money is a different world than a world without money. There is no comparison possible or conceivable. In a barter economy without money we cannot isolate interest from price movements along time, if there is no monetary interest rate to manipulate and no way to do economic calculation which can be falsified by that manipulation, there cannot be cycle. Barter rate is neither possible nor something conceivable in a monetary economy. 

But even if we accept that in order to determine a barter rate we need to use the aggregative concept of “real capital”, it is a concept that Mises clearly rejects as Festré shows:

"Wicksell He first defined in IP the rate of interest in compliance with the Austrian tradition of capitaltheory, i.e., as the “[natural] rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods.” (Wicksell [1936] 1965, p. 102)” In this quotation, we are to understand the term ‘real capital’ as equivalent to real savings, i.e. savings in natura. However, Mises’ conception of capital differs from that of Böhm-Bawerk and his followers. Firstly, he distinguishes capital goods from the broader notion of capital: “[Capital goods] are tools and half-finished products, or goods ready for consumption that make it possible for man to substitute, without suffering want during the waiting period, a more timeabsorbing process for another absorbing a shorter time (…) From the notion of capital goods one must clear distinguish the concept of capital. The concept of capital is the fundamental concept of economic calculation, the foremost mental tool of the conduct of affairs in the market economy.” (Mises [1949] 1996: 260-61, emphasis added) By this statement, we are to understand, as pointed out by Hayek, that Mises rejects Böhm-Bawerk’s notion of real capital in order “to rehabilitate the [Mengerian] abstract concept of capital as the money value of the property devoted to acquisitive purposes against the Smithian concept of the ‘produced means of production’.” (Hayek 1934a, p. 85).”" (Italics and bold added)[26]

Let’s see what Mises said:

“The economists... considered it necessary to construct a notion of real capital and to oppose it to the notion of capital as applied by the businessman whose calculation refers to the whole complex of his acquisitive activities. At the time the economists embarked upon these endeavors the place of the money equivalent of land in the concept of capital was still questioned. Thus the economists thought it reasonable to disregard land in constructing their notion of real capital. They defined real capital as the totality of the produced factors of production available. Hairsplitting discussions were started as to whether inventories of consumers’ goods held by business units are or are not real capital. But there was almost unanimity that cash is not real capital.”… “Now this concept of a totality of the produced factors of production is an empty concept. The money equivalent of the various factors of production owned by a business unit can be determined and summed up. But if we abstract from such an evaluation in money terms, the totality of the produced factors of production is merely an enumeration of physical quantities of thousands and thousands of various goods. Such an inventory is of no use to acting. It is a description of a part of the universe in terms of technology and topography and has no reference whatever to the problems raised by the endeavors to improve human well-being. We may acquiesce in the terminological usage of calling the produced factors of production capital goods.But this does not render the concept of real capital any more meaningful.”… “The worst outgrowth of the use of the mythical notion of real capital was that economists began to speculate about a spurious problem called the productivity of (real) capital.”… “No less detrimental was a second confusion derived from the real capital concept. People began to mediate upon a concept of social capital as different from private capital… “Originary interest is not a price determined on the market by the interplay of the demand for and the supply of capital or capital goods. Its height does not depend on the extent of this demand and supply” (Italics and bold added)[27]

The natural rate defined by Wicksell is determined by “real capital” (this is one of Wicksell’s definitions). However Mises rejected any use of the holistic notion of “real capital” and he said that people act with the “individual” notion of “capital”. We see that the barter economy not only is an abstract unreal concept, it is also useless and wrong to determine a rate of originary interest that would emerge in a money economy because of holistic concepts. Originary interest is not determined by the demand and supply of real capital goods.

But let’s throw away all what Mises said about the impossibility of any use of a compound of real capital and let’s look at Sraffa’s example. Even in his own “farmer-barter” example, Sraffa gets wrong about ABCT:

“The ‘arbitrary’ action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) ‘arbitrarily changed’ the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate.”

Hayek responded:

"Let us take Mr. Sraffa’s case in which the farmers “arbitrarily changed” the quantity of wheat produced… But would that fall in the rate of interest on wheat-loans cause anyone to start roundabout processes of production for which the available subsistence fund is not sufficient? There is no reason whatever to assume this. In so far as people live on wheat, they will actually be provided with food for a longer period; and in so far as the lower price of wheat will induce people to eat more of it – instead of something else – these other goods will also be available for a longer period of time, and interest in terms of these goods will also fall. The effects will be just the same as if a corresponding amount of wheat had been saved, and when, as aconsequence of the fall in the price of wheat, its output falls again, the accumulation of capital made possible by the surplus of wheat will supply cease." (Italics and bold added)

With Mises we can reinforce this point:

"Additional capital can be accumulated only by saving, i.e., a surplus of production over consumption. Saving may consist in a restriction of consumption. But it can also be brought about, without a further restriction in consumption and without a change in the input of capital goods, by an increase in net production. Such an increase can appear in different ways: 1. Natural conditions have become more propitious. Harvests are more plentiful. People have access to more fertile soil and have discovered mines yielding higher returns per unit of input." (Italics and bold added)[28]

Mises’s point 1. is very similar to the example Sraffa uses, but Mises (and Hayek) were smart enough to know that it is not an “arbitrary” action but a real accumulation of capital. The essence of ABCT is that, monetary economic calculation is falsified because, there are no savings or capital goods to complete the (un)profitable projects started under the illusion that there actually are enough savings in the first place. The distortion is caused in the money rate and makes think to individual entrepreneur (by distortion of his individual calculation) that there are enough of the individual and specific resources he needs to start and complete the profitable project. That is what Sraffa never understood as Hayek demonstrated:

"The case would, however, be different if the actual supply of wheat were not changed, but if, under the mistaken impression that the supply of wheat would greatly increase, wheat dealers sold short greater quantities of future wheat than they will actually be able to supply. This is the only case I can think of where, in a barter economy, anything corresponding to the deviation of the money rate from the equilibrium rate could possibly occur."

Round 2: 

It was not a "unique rate"

Sraffa:

"[In] times of expansion of production, due to additions to savings, there is no such thing as an equilibrium (or unique natural) rate of interest, so that the money rate can neither be equal to, nor lower than it: the" natural" rate of interest on producers' goods, the demand for which has relatively increased, is higher than the" natural" rate on consumers' goods, the demand for which has relatively fallen.”… “I pointed out that only under conditions of equilibrium would there be a single rate; and that when saving was in progress there would at anyone moment be many "natural" rates, possibly as many as there are commodities…" (Italics added)

Mises explicitly rejected the idea that outside equilibrium (in a changing economy) there could be a uniform or equilibrium rate. One more time here is Agnes Festré:

"In Human Action, things become different. First, Mises focused on the rate of originary interest, which he defines as the ratio between the prices of present and future goods. But this rate can coincide with the rate of interest on loans only in the imaginary construction of the evenly rotating economy. In this case, “we may call this rate the neutral rate of interest.” (Mises 1996 [1949], p. 538). In every situation where the ‘money relation’ i.e., the ratio between the demand for and the supply of money for cash holdings is changed, the resulting modifications in the wealth and the income of individuals alter the height of originary interest. Thus, the driving force of money has the power to bring about lasting changes in the final rate of originary interest (ibid.). By this, we are to understand that 1. there cannot be any conceivable uniform rate of originary interest in a changing economy; 2. there is no more permanence in the rate of originary interest than in prices and wage rates:"... "Furthermore, the loan rate of interest is not any longer considered as determining the current rate of interest as it is manifested in the ratio of the prices of present over future goods..."... "What now plays the same role as the loan rate of interest in the Theory is the ‘gross rate of interest’, as it already appeared in his 1936 article: “The ‘Austrian’ Theory of the Trade Cycle”. This rate should not be confused with the originary rate of interest or the rate of interest on capital. There are, indeed, as many gross rate of interest as there are individual debt contracts, so that gross market rates are not pure interest rates (ibid., p. 539). In other terms, the gross rate of interest incorporates the uncertainty component of both parts on the contract."…" (Italics and bold added)[29]

And here is Mises in a long “mix” of quotations on the same subject:

"In the market economy in which all acts of interpersonal exchange are performed by the intermediary of money, the category of originary interest manifests itself primarily in the interest on money loans. It has been pointed out already that in the imaginary construction of the evenly rotating economy the rate of originary interest is uniform. There prevails in the whole system only one rate of interest. The rate of interest on loans coincides with the rate of originary interest as manifested in the ratio between prices of present and of future goods. We may call this rate the neutral rate of interest. The evenly rotating economy presupposes neutral money. As money can never be neutral, special problems arise. If the money relation—i.e., the ratio between the demand for and the supply of money for cash holding—changes, all prices of goods and services are affected. These changes, however, do not affect the prices of the various goods and services at the same time and to the same extent. The resulting modifications in the wealth and income of various individuals can also alter the data determining the height of originary interest. The final state of the rate of originary interest to the establishment of which the system tends after the appearance of changes in the money relation, is no longer that final state toward which it had tended before. Thus, the driving force of money has the power to bring about lasting changes in the final rate of originary interest and neutral interest.”… “However, all these assumptions are not only imaginary, they cannot even hypothetically be thought of without contradiction. In the changing economy, the rate of interest can never be neutral. In the changing economy, there is no uniform rate of originary interest; there only prevails a tendency toward the establishment of such uniformity. Before the final state of originary interest is attained, new changes in the data emerge which divert anew the movement of interest rates toward a new final state. Where everything is unceasingly in flux, no neutral rate of interest can be established.”… “The gross rates of interest as determined on the loan market are not uniform. The entrepreneurial component which they always include varies according to the peculiar characteristics of the specific deal.”… “The connexity between all sectors of the loan market and the gross rates of interest determined on them is brought about by the inherent tendency of the net rates of interest included in these gross rates toward the final state of originary interest. With regard to this tendency, catallactic theory is free to deal with the market rate of interest as if it were a uniform phenomenon, and to abstract from the entrepreneurial component which is necessarily always included in the gross rates and from the price premium which is occasionally included. The prices of all commodities and services are at any instant moving toward a final state. If this final state were ever to be reached, it would show in the ratio between the prices of present goods and future goods the final state of originary interest. However, the changing economy never reaches the imaginary final state. New data emerge again and again and divert the trend of prices from the previous goal of their movement toward a different final state to which a different rate of originary interest may correspond. In the rate of originary interest there is no more permanence than in prices and wage rates.”… “Like every change in the market data, changes in the money relation can possibly influence the rate of originary interest.”… “The final state of the market rate of interest is the same for all loans of the same character. Differences in the rate of interest are caused either by differences in the soundness and trustworthiness of the debtor or by differences in the terms of the contract. Differences in interest rates which are not brought about by these differences in conditions tend to disappear. The applicants for credits approach the lenders who ask a lower rate of interest. The lenders are eager to cater to people who are ready to pay higher interest rates. Things on the money market are the same as on all other markets.”… “Under the conditions of a market economy the rate of originary interest is, provided the assumptions involved in the imaginary construction of the evenly rotating economy are present, equal to the ratio of a definite amount of money available today and the amount available at a later date which is considered as its equivalent.”… “Originary interest can therefore in the changing economy never appear in a pure unalloyed form... In the changing economy during the period of production there also arise synchronously other changes in valuations. Some goods are valued higher than previously, some lower. These alterations are the source from which entrepreneurial profits and losses stem.”… “Originary interest is the outgrowth of valuations unceasingly fluctuating and changing. It fluctuates and changes with them... If there turns up in one sector of the market a margin between the prices of present goods and those of future goods which deviates from the margin prevailing in other sectors, a trend toward equalization is brought about by the striving of businessmen to enter those sectors in which this margin is higher and to avoid those in which it is lower. The final rate of originary interest is the same in all parts of the market of the evenly rotating economy.”… “There prevails upon the loan market a tendency toward the equalization of gross interest rates for loans for which the factors determining the height of the entrepreneurial component and the price premium are equal. ... Gross interest rates as they appear in reality have nothing else in common than those characteristics which catallactic theory sees in them. They are complex phenomena and can never be used for the construction of an empirical or a posteriori theory of interest." (Italics and bold added)[30]

Taking the risk of me been accused of excessive citing, it must be out of any doubt that for Mises neither originary interest nor the gross market rate can be uniform in a changing economy, there is no other possible interpretation.

It is not an equilibrium what is broken but it is a process what is disturbed. A market process is not an equilibrium, that is precisely what distinguishes austrians from neo-classics. Credit expansion interrupts the never-ending and always changing market process of adjustment to (in this case, temporal) subjective valuations. As originary interest rate is always changing (it is neither unique nor uniform) because in a changing economy subjective valuations on time (and other valuations) are changing, the tendency is also always changing. The direction of the tendency of market gross rate is to adjust to the originary interest (of course it is a goal never reached in the real world). The ABCT is based on a (temporary) deviation from that tendency. The reason why the market monetary rate can deviate temporarily from that tendency by interference of banks, is the unevenness effect of the non-neutrality of money (unevenness only present in non-neutral money and changing world). Actually the “new” credit is also an agent of change in itself, it has the power to modify the data of market.[31] The market process which tend to adjust (but never reach) money gross rate to subjective valuations of time preference (always changing), will result in some value depending the constellation of data of time preferences of each moment. Credit expansion impulses market process in a wrong direction, a direction not determined by voluntary time preferences decisions. The way to do that is with additional injections of credit out of thin air. In order to interrupt and deviate the process, the injection must be continued for some time, only one injection is not enough[32]:

"In analyzing the process of credit expansion, let us assume that the economic system’s process of adjustment to the market data and of movement toward the establishment of final prices and interest rates is disturbed by the appearance of a new datum, namely, an additional quantity of fiduciary media offered on the loan market.”… “The beginning of a new credit expansion runs across remainders of preceding malinvestment and malemployment, not yet obliterated in the course of the readjustment process, and seemingly remedies the faults involved. In fact, however, this is merely an interruption of the process of readjustment and of the return to sound conditions." (Italics and bold added)[33]

It is obvious that Mises was not explaining the deviation from a “unique” rate, but a deviation from a process of adjustment to a definite market data which, if not change anymore (a very unreal assumption), would establish a unique rate. However he is not assuming that this unique rate exists! The economy’s process of adjustment[34] to a new false data (the availability of more “credit”) will result in a massive cluster of errors (boom) and when they are discovered (crisis) the process of adjusting to the real data (recession) will emerge. It is the process what is perturbed, the appearance of new fiduciary media (credit expansion) makes that the process deviates from what would have been without that perturbation.  

And Mises notes that final prices (and interest) in ERE (or "equilibrium") are not and cannot be real world-market prices:

“The imaginary construction of the evenly rotating economy is a mental tool for comprehension of entrepreneurial profit and loss. It is, to be sure, not a design for comprehension of the pricing process. The final prices corresponding to this imaginary conception are by no means identical with the market prices. The activities of the entrepreneurs or of any other actors on the economic scene are not guided by consideration of any such things as equilibrium prices and the evenly rotating economy. The entrepreneurs take into account anticipated future prices, not final prices or equilibrium prices. They discover discrepancies between the height of the prices of the complementary factors of production and the anticipated future prices of the products, and they are intent upon taking advantage of such discrepancies. These endeavors of the entrepreneurs would finally result in the emergence of the evenly rotating economy if no further changes in the data were to appear." (Italics added)[35]

All the confusion of this discussion is due to the faulty neo-classic concept of "equilibrium"[36]. Equilibrium is a dead non-changing world. In the real world we must talk about “harmony”, a process of complementary actions. This harmony of (intertemporal) complementarity in actions of individuals is disturbed by the action of banks, this agents makes the action of individuals be in disharmony due to the introduction of wrong data (new fiduciary media).

But Even in 1928 Mises speaks about a tendency, not equilibrium, in real world and clarifies that he uses concepts known by every economist in that age. After this, he would develop his own views on this:

The “natural interest rate” is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing “natural interest rate.” Assume, however, that the equilibrium, toward which the market is moving, is disturbed by the interference of the banks.”… “Since it always requires some time for the market to reach full “equilibrium,” the “static” or “natural”36 prices, wage rates and interest rates never actually appear. The process leading to their establishment is never completed before changes occur which once again indicate a new “equilibrium.” At times, even on the unhampered market, there are some unemployed workers, unsold consumers’ goods and quantities of unused factors of production, which would not exist under “static equilibrium.” With the revival of business and productive activity, these reserves are in demand right away. However, once they are gone, the increase in the supply of fiduciary media necessarily leads to disturbances of a special kind.

36 In the language of Knut Wicksell and the classical economists.”

“Every deviation from the prices, wage rates and interest rates which would prevail on the unhampered market must lead to disturbances of the economic “equilibrium.” This disturbance, brought about by attempts to depress the interest rate artificially, is precisely the cause of the crisis.”… “According to the Circulation Credit Theory, it is clear that the direct stimulus which provokes the fluctuations is to be sought in the conduct of the banks. Insofar as they start to reduce the “money rate of interest” below the “natural rate of interest,” they expand circulation credit, and thus divert the course of events away from the path of normal development" (Italics and bold added)[37]

And let’s give special attention to this passage:

"The development of the Three Market Barometer is considered the most important accomplishment of the Harvard investigations. Since it is not possible to determine Wicksell’s natural rate of interest or the “ideal” price premium, we are advised to compare the change in the interest rate with the movement of prices and other data indicative of business conditions, such as production figures, the number of unemployed, etc." (Italics and bold added)

Ludwig van den Hauwe says this about adjustment process:

“(1) Relative price changes brought about by monetary factors are not equilibrium relative prices, that is, the prices are not consistent with the underlying real factors. The systematic distortion of relative prices misdirects production temporarily. But as economic agents discover that plans are not coordinated, real forces will reassert themselves. The misdirection is corrected and cyclical phenomena are observed (p. 159). This is not meant to imply, however, that relative prices will, in general, return to their previous, pre-boom levels.
(2) An injection of additional money and credit through the banking system can postpone the need for adjustment (if the stress is laid upon the word postpone). However, the additional increases in the effective quantity of money must be progressively larger if the new conditions are to be maintained and the crisis is to be avoided (pp. 139–40). The policy recommendation is similar but not totally identical, however. In Prices and Production Hayek (1935) recommended the constant-MV norm for the exercise of monetary policy. Hayek argued that macroeconomic coordination is best promoted by a constant MV. The implied monetary rule, then, is: Increase M to offset decreases in V, but allow decreases in P to accommodate increases in T. He had not argued, however, that the rule would ensure neutrality, a view wrongly imputed to him by Sraffa (1995, p. 199; see also Steele 1996, p. 132; and Hayek 1935, p. 131)" (Italics and bold added)[38]

Shenoy has the same opinion on where Sraffa gets wrong:

"Sraffa remains firmly within the Anglo-American framework. He, therefore, finds the analysis of the capital structure to be both obstructive and unintelligible; he is plainly irritated by such irrelevant “preliminaries”, whose “description [obscures] the main issue”. Not surprisingly, Sraffahas to focus on Hayek’s auxiliary monetary assumption (that MV is constant) and his tentative comments on monetary policy, and treat these as the central theory, fully-fledged and self-sufficient. Sraffa’s conceptual prism, in other words, filters out the cat and shows him only the grin — or perhaps a few whiskers. So Sraffa argues that it is completely irrelevant whether inflated or uninflated money is used to purchase “capital” [non-consumption] goods; consumption is still reduced and the goods are just as [automatically] productive. Where the funds are inflated, there is class robbery: but the robbed party — the workers — cannot force the robber-capitalists to give up the goods. Thus Sraffa excuses himself from trying to grapple with the capital structure: “Hayek as it were builds up a terrific steam-hammer in order to crack a nut — and then he does not crack it.” So “we need not spend time criticizing the hammer” Thus, Sraffa explicitly refuses to tackle the vital issue: the analysis of the interconnected investment chains that yield final outputs. Thus he cannot see that only after such an analysis is it possible to consider the effect of inflation on the formation of such investment chains. He chooses rather to criticize Hayek’s observations and comments on this effect, with no knowledge of what is being affected and, therefore, how it is affected. Instead, Sraffa develops some aspects of his own Ricardian theory." (Italics and bold added)[39]

So having shown this, let’s see the issue of neutrality.

Round 3:

It was not a "equilibrium-neutral rate" and there can never be a neutral money.

Sraffa: 

“The starting-point and the object of Dr. Hayek’s inquiry is what he calls ‘neutral money’; that is to say, a kind of money which leaves production and the relative prices of goods, including the rate of interest, ‘undisturbed,’ exactly as they would be if there were no money at all. This method of approach might have something to recommend it, provided it were constantly kept in mind that a state of things in which money is ‘neutral’ is identical with a state in which there is no money at all: as Dr. Hayek once says, if we ‘eliminate all monetary influences on production ... we may treat money as non-existent’”… “Being entirely unaware that it may be doubted whether under a system of barter the decisions of individuals would have their full effects, once he has satisfied himself that a policy of constant money would achieve this result, he identifies it with "neutral money"; and finally, feeling entitled to describe that policy as " natural," he takes it for granted that it will be found desirable by every right-thinking person. So that "neutral" money, from being in the first lecture the object of theoretical analysis (p. 28), is shown in the body of the book to be "not merely entirely harmless, but in fact the only means of avoiding misdirections of production" (p. 89), and in the end becomes " our maxim of policy" (p. 106).”

Mises never looked for a “neutral money” policy (neither Hayek did: “Mr. Sraffa's suggestion that I am surreptitiously shifting my position from the theoretical analysis of " neutral" money to the defence of one particular maxim of monetary policy is entirely due to his misunderstanding of this point”… “there is no justification for the suggestion that, after this, my exposition illegitimately takes certain aims of economic policy for granted…”). Actually anyone who has ever read Mises knows perfectly that for him there can never be a neutral money in the real world.

He knew perfectly well that starting point in not sane:

"Both Menger and Böhm-Bawerk tacitly assumed the neutrality of money. They had developed the theory of direct exchange and held to the opinion that all problems of economic theory could be solved without the imaginary notion of money-free market exchanges. This teaching was now made untenable by my theory of the inevitable non-neutrality of money.”… “In my book on money I had directed my critique at the widely accepted concept of direct exchange without use of money only inasmuch as it was necessary to reject the doctrine of the neutrality of money." (Italics added)[40]

"The economists depict a purely hypothetical entity, a market without indirect exchange, without a medium of exchange, without money... But we have to realize that it is a hypothetical concept which has no counterpart in reality. The actual market is necessarily a market of indirect exchange and moneytransactions. From this assumption of a market without money, the fallacious idea of neutral money is derived. The economists were so fond of the tool which this hypothetical concept provided that they overestimated the extent of its applicability. They began to believe that all problems of catallactics could be analyzed by means of this fictitious concept." (Italics added)[41]

"The money expended additionally by such a “dishoarding” brings about a tendency toward higher prices in the same way as that flowing from the gold mines or from the printing press. Conversely, prices drop when the supply of money falls (e.g., through a withdrawal of paper money) or the demand for money increases (e.g., through a tendency toward “hoarding,” the keeping of greater cash balances). The process is always uneven and by steps, disproportionate and asymmetrical.”… The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and interest rates neither at the same time nor to the same extent. If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various strata of the population. Then the gross market rate of interest too would not be affected—either temporarily or lastingly— by changes in the sphere of money and circulation credit. The fact that such changes can modify the rate of originary interest is caused by the changes which this unevenness brings about in the wealth and income of various individuals. The fact that, apart from these changes in the rate of originary interest, the gross market rate is temporarily affected is in itself a manifestation of this unevenness. If the additional quantity of money enters the economic system in such a way as to reach the loan market only at a date at which it has already made commodity prices and wage rates rise, these immediate temporary effects upon the gross market rate of interest will be either slight or entirely absent. The gross market rate of interest is the more violently affected, the sooner the inflowing additional supply of money or fiduciary media reaches the loan market.”… “A serious blunder that owes its origin and its tenacity to a misinterpretation of this imaginary construction was the assumption that the medium of exchange is a neutral factor only. According to this opinion the only difference between direct and indirect exchange was that only in the latter was a medium of exchange used. The interpolation of money into the transaction, it was asserted, did not affect the main features of the business. They tacitly assumed that changes in purchasing power occur with regard to all goods and services at the same time and to the same extent. This is, of course, what the fable of money’s neutrality implies.”… “There is first of all the spurious idea of the supposed neutrality of money… It was not realized that changes in the quantity of money can never affect the prices of all goods and services at the same time and to the same extent. Nor was it realized that changes in the purchasing power of the monetary unit are necessarily linked with changes in the mutual relations between those buying and selling.”… "The notion of a neutral money is no less contradictory than that of a money of stable purchasing power. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all. It is a popular fallacy to believe that perfect money should be neutral and endowed with unchanging purchasing power, and that the goal of monetary policy should be to realize this perfect money... With the real universe of action and unceasing change, with the economic system which cannot be rigid, neither neutrality of money nor stability of its purchasing power are compatible. A world of the kind which the necessary requirements of neutral and stable money presuppose would be a world without action. It is therefore neither strange nor vicious that in the frame of such a changing world money is neither neutral nor stable in purchasing power. All plans to render money neutral and stable are contradictory. Money is an element of action and consequently of change. Changes in the money relation, i.e., in the relation of the demand for and the supply of money, effect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in a different way.”… “With neutral money, neutralization of the rate of interest could also be attained by another stipulation, provided the parties are in a position to anticipate correctly the future changes in purchasing power… The rate of interest is neutral. However, all these assumptions are not only imaginary, they cannot even hypothetically be thought of without contradiction. In the changing economy, the rate of interest can never be neutral. In the changing economy, there is no uniform rate of originary interest; there only prevails a tendency toward the establishment of such uniformity. Before the final state of originary interest is attained, new changes in the data emerge which divert anew the movement of interest rates toward a new final state. Where everything is unceasingly in flux, no neutral rate of interest can be established. In the world of reality all prices are fluctuating and acting men are forced to take full account of these changes. Entrepreneurs embark upon business ventures and capitalists change their investments only because they anticipate such changes and want to profit from them... These speculative ventures of the promoters revolutionize afresh each day the structure of prices and thereby also the height of the gross market rate of interest. He who expects a rise in certain prices enters the loan market as a borrower and is ready to allow a higher gross rate of interest than he would allow if he were to expect a less momentous rise in prices or no rise at all. On the other hand, the lender, if he himself expects a rise in prices, grants loans only if the gross rate is higher than it would be under a state of the market in which less momentous or no upward changes in prices are anticipated. The borrower is not deterred by a higher rate if his project seems to offer such good chances that it can afford higher costs. The lender would abstain from lending and would himself enter the market as an entrepreneur and bidder for commodities and services if the gross rate of interest were not to compensate him for the profits he could reap this way. The expectation of rising prices thus has the tendency to make the gross rate of interest rise, while the expectation of dropping prices makes it drop." (Italics and bold added)[42]

In the evenly rotating economy there is no change (i.e. it is not a changing economy), so the rate of interest is unique, uniform and neutral. But ERE is not real, and is impossible to be real because it is a static and self-contradictory construction if we take it to the extreme, however useful it can be to study some subjects.  

Actually there is no real money in the ERE, that money is not the money we know: 

"The evenly rotating economy is a fictitious system in which the market prices of all goods andservices coincide with the final prices… All factors…are constant. Therefore prices — commonly called static or equilibrium prices — remain constant too…The essence of this imaginary construction is the elimination of the lapse of time and of the perpetual change in market phenomena. The notion of any change with regard to supply and demand is incompatible with this construction. Only such changes as do not affect the configuration of the price-determining factors can be considered in its frame.”… “The predilection with which mathematical economists almost exclusively deal with the conditions of these imaginary constructions and with the state of "equilibrium" implied in them, has made people oblivious of the fact that these are unreal, self-contradictory and imaginary expedients of thought and nothing else. They are certainly not suitable models for the construction of a living society of acting men.”… “It has been pointed out already that in the imaginary construction of an evenly rotating economy the very notion of money vanishes into an unsubstantial calculation process, self-contradictory and devoid of any meaning. It is impossible to assign any function to indirect exchange, media of exchange, and money within an imaginary construction the characteristic mark of which is unchangeability and rigidity of conditions. Where there is no uncertainty concerning the future, there is no need for any cash holding. As money must necessarily be kept by people in their cash holdings, there cannot be any money. The use of media of exchange and the keeping of cash holdings are conditioned by the changeability of economic data. Money in itself is an element of change; its existence is incompatible with the idea of a regular flow of events in an evenly rotating economy… Money is neither an abstract numeraire nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the services which a man expects from holding cash. On the market there is always change and movement. Only because there are fluctuations is there money. Money is an element of change not because it “circulates,” but because it is kept in cash holdings. Only because people expect changes about the kind and extent of which they have no certain knowledge whatsoever, do they deep money. While money can be thought of only in a changing economy, it is in itself an element of further changes. Every change in the economic data sets it in motion and makes it the driving force of new changes. Every shift in the mutual relation of the exchange ratios between the various nonmonetary goods not only brings about changes in production and in what is popularly called distribution, but also provokes changes in the money relation and thus further changes. Nothing can happen in the orbit of vendible goods without affecting the orbit of money, and all that happens in the orbit of money affects the orbit of commodities.”… “In reality there is never such a thing as an evenly rotating economic system.”… “When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings; no more gold is used for monetary purposes. The individuals and firms own claims against the central bank, the maturity of each part of which precisely corresponds to the amount they will need on the respective dates for the settlement of their obligations. The central bank does not need any reserves as the total sum of the daily payments of its customers exactly equals the total sum of withdrawals. All transactions can in fact be effected through transfer in the bank's books without any recourse to cash. Thus the "money" of this system is not a medium of exchange; it is not money at all; it is mereiy a numéraire, an ethereal and undetermined unit of accounting of that vague and indefinable character which the fancy of some economists and the errors of many laymen mistakenly have attributed to money... But the notion of a neutral money is unrealizable and inconceivable in itself. If we were to use the inexpedient terminology employed in many contemporary economic writings, we would have to say: Money is necessarily a "dynamic factor"; there is no room left for money in a "static" system. But the very notion of a market economy without money is self-contradictory. The imaginary construction of an evenly rotating system is a limiting notion. In its frame there is in fact no longer any action. Automatic reaction is substituted for the conscious striving of thinking man after the removal of uneasiness. We can employ this problematic imaginary construction only if we never forget what purposes it is designed to serve. We want first of all to analyze the tendency, prevailing in every action, toward the establishment of an evenly rotating economy; in doing so, we must always take into account that this tendency can never attain its goal in a universe not perfectly rigid and immutable, that is, in a universe which is living and not dead. Secondly we need to comprehend in what respects the conditions of a living world in which there is action differ from those of a rigid world." (Italics and bold added)[43]

As we see, it is unreal, self-contradictory, faulty, etc. to talk about a “neutrality of money” in the real world. There can never be such thing in reality, it is absolutely impossible. Mises have never asked for a “policy” to make money “neutral”, on the contrary he spent all his career to demonstrate how ridicule that concept is. His monetary theory and his business cycle theory are based on the non-neutrality of money. Non-neutrality is only possible in the changing world, in the imaginary and unreal ERE money is neutral as well as interest. ABCT did not looked for or recommended a “neutral” money policy in misesian view.

We also see now why it was important to make a distinction between a manipulated and a non-manipulated rate. It is the unevenness what causes differences in the rate of interest which is tending to adjust to market data and hampering this process via credit expansion. This unevenness is absent assuming neutral money. Without this unevenness (only possible if money is non-neutral) there is no cycle. The validity of ABCT is only possible in a changing world with non-neutral money, there must be an unevenness effect:

"Eventually, the issue of fiduciary media in such manner can also lead to increased capital accumulation within narrow limits and, hence, to a further reduction of the interest rate. In the beginning, however, an immediate and direct decrease in the loan rate appears with the issue of fiduciary media, but this immediate decrease in the loan rate is distinct in character and degree from the later reduction. The new funds offered on the money market by the banks must obviously bring pressure to bear on the rate of interest." (Italics and bold added)[44]

Finish Him!!:

The policy for banks is NOT to target a “natural rate”

The last word of Sraffa, and the one that make him think he is victorious, is that, according to the italian, Hayek’s monetary “policy":

“Dr. Hayek's ideal maxim for monetary policy, like that of Wicksell, was that banks should adopt the 'natural' rate as their 'money' rate for loans… Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates.”

Was this “policy” what the creator of ABCT (Mises) proposed? No. Here is Mises in 1940:

"If a bank is unable to expand credit it cannot create an upswing even if it lowers its interest rate below the market rate. It would merely make a gift to its debtors. The conclusion to be drawn from the monetary theory of the cycle with regard to stabilizing measures is not the postulate that the banks should not lower the interest rate, but that they should not expand credit. This [Gottfried] Haberler (Prosperity and Depression, League of Nations, Geneva, 1939, p. 65ff.) misunderstood and therefore his criticisms are untenable." (Italics and bold added)[45]

And here is in 1949 explaining the same thing with a little change in words:

"If a bank does not expand circulation credit by issuing additional fiduciary media (either in the form of banknotes or in the form of deposit currency), it cannot generate a boom even if it lowers the amount of interest charged below the rate of the unhampered market. It merely makes a gift to the debtors. The inference to be drawn from the monetary cycle theory by those who want to prevent the recurrence of booms and of the subsequent depressions is not that the banks should not lower the rate of interest, but that they should abstain from credit expansion. Professor Haberler(Prosperity and Depression, pp. 65-66) has completely failed to grasp this primary point, and thus his critical remarks are vain." (Italics and bold added)[46]

In this passages Mises was answering a question raised by some economists (Haberler and even Hayek): If market rate of interest change and rise, what would happened if banks do not rise the interest rate they charge to accommodate to this new situation? Would that mean that the bank’s rate is below “natural rate”? Would that initiate a cycle? Mises’s answer is no as long as they do not expand credit.

"It has been asserted that the credit expansion is released by the rise in the rate of interest through the failure of the banks to raise their interest rates in accordance with the rise in the “natural” rate. This argument too misses the main point of the monetary theory of the cycle. Whether the credit expansion gets under way because the banks ease credit terms, or because they fail to stiffen the terms in accordance with changed market conditions, is of minor importance. Decisive only is the fact that there is credit expansion because there exist institutions which consider it their task to influence interest rates by the granting of additional credit.”…“There is no doubt that credit expansion leads to a reduction of the interest rate in the short run. At the beginning, the additional supply of credit forces the interest rate for money loans below the point which it would have in an unmanipulated market. But it is equally clear that even the greatest expansion of credit cannot change the difference in the valuation of future and present goods. The interest rate must ultimately return to the point at which it corresponds to this difference in the valuation of goods. The description of this process of adjustments the task of that part of economics which is called the theory of the business cycle." (Italics and bold added)[47]

And also:

“If one wants to know whether or not there is credit expansion, one must look at the state of the supply of fiduciary media, not at the arithmetical state of interest rates."

Mises is saying that banks can lower interest rate if they want to. Lowering banks rates below “natural” rate is not a problem (for the rest of the economy of course, it certainly is a problem for the economic situation of banks because they are making "gifts”) and do not cause a cycle. If this lowering is made without credit expansion it will not cause a cycle. The problem is not and has never been a problem of “accommodate” bank’s interest rate to “the” natural rate. In other words even assuming that Sraffa was right and that there are “multiple rates” of interest outside equilibrium, this is not at all a problem for ABCT in the misesian construction. Because banks can put the interest rate they want (of course this does not mean that they will not lose money acting in such uneconomic way) and they must not adjust to any “natural” rate, but in order to initiate a cycle they must expand credit. A lowering rate as consequence of credit expansion is what creates a boom. The cycle is not caused by a lower interest rate per se, but by a lowering via credit expansion. There could be as many rates as you want, but as long as there is no credit expansion there will be no credit cycles and no need for a “policy” to target any rate. For Mises banks need not to adjust their interest rate to “the” natural rate (this is what Sraffa was “refuting”) to avoid cycles, all that they must do is to abstain of expanding credit. I cannot even imagine a better refutation to Sraffa’s final “victorious” comment using Mises’s own words.

But even assuming that banks “must” adjust to the “natural rate”, if they already embarked in a credit expansion policy (coming from a past situation in which the interest rate was determined by market without “new” fiduciary media), can they return to the previous “natural” rate of interest to return to sound conditions without stopping expanding credit? Is that feasible? Mises knew that the answer is no. Because a) banks are still expanding credit and b) even if they stop expanding the actual rate is not the same rate that prevailed before credit expansion, all the situation has changed:

"Yet, even if the banks revert to the former “natural rate,” the rate which prevailed before their credit expansion affected the market, they still lag behind the rate which would now exist on the market if they were not continuing to expand credit. This is because a positive price premium must now be included in the new “natural rate.” With the help of this new quantity of fiduciary media, the banks now take care of the businessman's intensified demand for credit. Thus, the crisis does not appear yet.… the boom continues." (Italics and bold added)[48]

"The banks are faced with an increased demand for loans and advances on the part of business. The entrepreneurs are prepared to borrow money at higher gross rates of interest. They go on borrowing in spite of the fact that banks charge more interest. Arithmetically, the gross rates of interest are rising above their height on the eve of the expansion. Nonetheless, they lag catallactically behind the height at which they would cover originary interest plus entrepreneurial component and price premium… [The banks] fail to see that in injecting more and more fiduciary media into the market they are in fact kindling the boom. It is the continuous increase in the supply of the fiduciary media that produces, feeds, and accelerates the boom.”… “As soon as the afflux of additional fiduciary media comes to an end, the airy castle of the boom collapses… the depression is in fact the process of readjustment, of putting production activities anew in agreement with the given state of the market data: the available supply of factors of production, the valuations of the consumers, and particularly also the state of originary interest as manifested in the public’s valuations. These data, however, are no longer identical with those that prevailed on the eve of the expansionist process… The final state to the establishment of which the market tends is no longer the same toward which it tended before the disturbances created by the credit expansion." (Italics and bold added)[49]

We can go even before 1940, to 1928 and 1933, in order to see Mises’s recommendation of not expansion of credit:

"The aim is not to keep prices stable, but to prevent the free market interest rate from being reduced temporarily by the banks of issue or by monetary inflation… [If] the production of gold increases and prices rise…. As prices and wages rise [resulting in an increased demand for business loans], modern theory maintains that the interest rates should rise and circulation credit be restricted.”… “The most important prerequisite of any cyclical policy, no matter how modest its goal may be, is to renounce every attempt to reduce the interest rate, by means of banking policy, below the rate which develops on the market. That means… to suppress all future expansion of circulation credit and thus all further creation of fiduciary media.”… “The periodically returning crises of cyclical changes in business conditions are the effect of attempts, undertaken repeatedly, to underbid the interest rates which develop on the unhampered market. These attempts to underbid unhampered market interest rates are made through the intervention of banking policy—by credit expansion through the additional creation of uncovered notes and checking deposits—in order to bring about a boom.”… “No one wants to adopt the only effective means—the limitation of circulation credit— because they do not want to drive interest rates up. In times of declining prices, however, they have been more than ready to adopt credit expansion measures, as this goal is attainable by the means already desired, i.e., by reducing interest rates" (Italics and bold added)[50]

Rothbard[51] was also perfectly aware of this:

“During the early 1930s… Mises [was] asserting that the cycle is always generated by the interventionary banking system and his followers claiming that often banks might only err in being passive and not raising their interest charges quickly enough. The followers held that for one reason or another the “natural rate” of interest might rise, and that the banks, which after all are not omniscient, may inadvertently cause the cycle by merely maintaining their old interest rate, now below the free-market rate. In defense of the Mises “anti-bank” position, we must first point out that the natural interest rate or “profit rate” does not suddenly increase because of vague improvements in “investment opportunities.” The natural rate increases because time preferences increase.36 But how can banks force market interest rates below the free-market rates? Only by expanding their credit! To avoid the business cycle, then, it is not necessary for the banks to be omniscient; they need only refrain from credit expansion. If they do so, their loans made out of their own capital will not expand the money supply but will simply take their place with other savings as one of the determinants of the free-market interest rate.37

37 Mises points out (Human Action, p. 789n.) that if the banks simply lowered the interest charges on their loans without expanding their credit, they would be granting gifts to debtors, and would not be generating a business cycle" (Italics and bold added)[52]

Only after I have reached this conclusion, I have found that Block and Garschina said the same thing years ago:

"There is another grave problem with Hayek's 1933 analysis. He believes that the banks are not "guilty" of causing business cycles also because he thinks that in the early stages the "natural rate of interest" or profit on the market increases, and that the banks are not astute enough to realize it, so that they only pull the loan rate of interest below the natural rate, that is, by not raising their loan rates fast enough to match changes in the natural rate. The difficulty with this is that it misconceives the Misesian (1912) insight. The problem is not one of omission, rather it is one of commission; it is not that the banks are too passive and ignorant about finding the right loan rate to match the natural rate. Instead, it is that they actively expand credit beyond the cash in their vaults, thereby pushing the loan rate below the natural rate. In short, the Misesian view is that the banks don't have to search for the natural rate in order to avoid generating the business cycle; all they have to do is not expand credit beyond their cash holdings. This is surely a much easier task. The banks' insistence on expanding credit generates the business cycle, and makes them responsible and thus "guilty" as charged." (Italics and bold added)[53]

Actually the banks can raise the interest rate and at the same time provoke a boom cycle. How can they? Only if they expand credit!!!

"New businesses are started in the expectation that the necessary capital can be secured by obtaining credit. To be sure, in the face of growing demand, the banks now raise the “money interest rate.” Still they do not discontinue granting further credit. They expand the supply of fiduciary media issued, with the result that the purchasing power of the monetary unit must decline still further. Certainly the actual “money interest rate” increases during the boom, but it continues to lag behind the rate which would conform to the market, i.e., the “natural interest rate” augmented by the positive price premium."[54]

(Of course here “natural” rate means a rate not affected by credit expansion)

"It does not matter whether this drop in the gross market rate expresses itself in an arithmetical drop in the percentage stipulated in the loan contracts. It could happen that the nominal interest rates remain unchanged and that the expansion manifest itself in the fact that at these rates loans are negotiated which would not have been made before on account of the height of the entrepreneurial component to be included. Such an outcome too amounts to a drop in gross market rates and brings about the same consequences."[55]

And in 1965 he repeats again that the problem is between a market rate and a manipulated by banks rate:

"The height of the originary rate of interest, which is the main component of the market rate of interest as determined on the loan market, reflects the difference in the people’s valuation of present and future satisfaction of needs… It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and pecuniary interests of the personnel operating the government apparatus of coercion and compulsion, the much-referred-to “public sector” of the economy. But the government has the power to push the Federal Reserve System, and the banks subject to it, into a policy of cheap money. Then the banks are expanding credit. Underbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. Thus they are inescapably falsifying the businessmen’s estimation of market conditions." (Italics and bold added)[56]

And in 1931 he clarifies what he thinks when he talks about “natural” rate. A non-intervened by banks market rate of interest:

"According to the circulation credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy—expansion of bank credit by the issue or creation of additional fiduciary media (that is banknotes and/or checking deposits not covered 100 percent by gold).On a market, which is not disturbed by the interference of such an “inflationist” banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as “natural” or “static” interest rates. If these interest rates were adhered to, then economic development would proceed without interruption—except for the influence of natural cataclysms or political acts such as war, revolution, and the like. The fact that economic development follows a wavy pattern must be attributed to the intervention of the banks through their interest rate policy." (Italics and bold added)[57]

Also in 1946:

"Credit expansion not only brings about an inextricable tendency for commodity prices and wage rates to rise it also affects the market rate of interest. As it represents an additional quantity of money offered for loans, it generates a tendency for interest rates to drop below the height they would have reached on a loan market not manipulated by credit expansion." (Italics and bold added)[58]

The reduction of interest rate is not a reduction in absolute terms, but in relative terms. Relative to a rate of interest that would have prevailed in a market without credit expansion. This is the reason why ABCT is compatible even with a situation in which the rate of interest is raising in absolute terms, because is raising less than it would rise in an environment without credit expansion.[59]

As Huerta de Soto says:

"This lowering of the interest rate in the credit market does not necessarily manifest itself as a decrease in absolute terms. Instead a decrease in relative terms, i.e., in relation to the interest rate which would have predominated in the market in the absence of credit expansion, is sufficient. Hence the reduction is even compatible with an increase in the interest rate in nominal terms, if the rate climbs less than it would have in an environment without credit expansion (for instance, if credit expansion coincides with a generalized drop in the purchasing power of money). Likewise such a reduction is compatible with a decline in the interest rate, if the rate falls even more than it would have had there been no credit expansion (for example, in a process in which, in contrast, the purchasing power of money is growing). Therefore this lowering of the interest rate is a fact accounted for by theory, and one it will be necessary to interpret historically while considering the circumstances particular to each case." (Italics and bold added)[60]

As we saw, a careful examination of Mises’s writings (however not an exhausting one!) demonstrate that misesian ABCT is totally immune to all accusations about interest theory and policy issue raised by Sraffa against Hayek. Of course I did not examine his other “cardinal” point about “forced savings”. But the most important and always raised is this issue of “multiple interest”. In the next post I will exam some other details on this issue.

[1] I myself have looked for this footnote (using Google-Translate because I can’t speak german) in the first german edition of TMC and I did not find it there. So this footnote could have been incorporated in the second edition. After that, I found this explanation by Kirzner: “As we have seen the "Austrian" Theory of the Trade Cycle combined a key Wicksellian insight (on the divergence between the "money" rate of interest and the "natural" rate of interest) with ideas concerning the time-dimension of production, which had their source in Böhm-Bawerk's famous theories concerning capital and interest. Mises accepted key elements from Böhm-Bawerk's theories; but he also gradually grew dissatisfied with other elements in those theories. The first edition of his 1912 Theorie des Geldes und der Umlaufsmittel used Böhm-Bawerk's approach to the theory of capital-using production and interest without reservations. His 1924 second edition of that work, however, contained a rather lengthy footnote both praising Böhm-Bawerk for a "great achievement" and indicating some serious disagreement with his approach (TMC, 339n). Mises also used that footnote to refer to an anticipated "special study" of his own on the problem of interest, which he hoped would "appear in the not-too-distant future." That special study never did appear and apart from a number of brief observations on the area of capital and interest which appeared in various writings of Mises over the years, it was not until his 1940 treatise, Nationalökonomie, that Mises presented his complete theory of interest (along with a series of carefully formulated statements concerning the use of the term "capital" in theoretical discussion, with special critical emphasis upon its use in discussions of interest theory). This theory of interest he developed was so radical and so striking that when Frank Knight wrote his 1941 review article, he chose to concentrate virtually his entire discussion-in an article highly critical of Mises-on that topic, entitling it "Professor Mises and the Theory of Capital."… “What aroused Knight's analytical ire in Mises was, in particular, those areas in which Mises believed that his mentor had not proceeded consistently enough, or far enough, in the strictly "Austrian" (i.e., subjective) direction.” See Kirzner, Israel. Ludwig von Mises (2001) page 147-48. All the rest of the sections have no changed as Hülsmann notes: “As far as the exposition of Mises’s business-cycle theory is concerned (part 3, chap. 5, in part § 4), there are no differences between the first edition and later editions. But for a few exceptions the text is exactly the same (see1st ed., pp. 425–36; 2nd ed., pp. 366–75); the same is true for the entire chapter 5, except for § 5 (see below). Thus from the first edition, Mises’s business cycle theory contains the same discussion of forced savings, the reverse movement of prices, the natural rate of interest and deviations from it induced through fiduciary media, the importance of the subsistence fund, etc. as did all later editions. The difference between the first and the second edition relates to the concluding § 5 of chapter 5, where Mises discusses the significance of his own contribution to business-cycle theory.” Hülsmann, Güido. Mises: The Last Knight of Liberalism (2007) page 254.

[2] Mises, The Theory of Money and Credit (1912) pag. 339.

[3] Mises, Memoirs (1940) page 44.

[4] Hülsmann, Ibid. page 773.

[5] Agnés Festré, “Knowledge and individual behaviour in the Austrian tradition of business cycles: von Mises vs. Hayek” (2003).

[6] Hülsmann, Ibid. page 253.

[7] Mises, The Causes of the Economic Crisis (1978) page 107-108, “Monetary Stabilization and Cyclical Policy” (1928).

[8] Festré, Agnés. “Knut Wicksell and Ludwig von Mises on Money, Interest, and Price Dynamics” (2006).

[9] Zahringer, Kenneth A. “Monetary Disequilibrium Theory and Business Cycles: An Austrian Critique” (2012).

[10] Huerta de Soto, Jesus. Money, Bank Credit and Economic Cycles (1998) page 359.

[11] Hazlitt, Henry. The Failure of the "New Economics" (1959) page 243.

[12] Fisher, Irving. The Theory of Interest (1930) page 42.

[13] Fisher, Irving. “Appreciation and Interest: A Study of the Influence of Monetary Appreciation and Depreciation on the Rate of Interest with Applications to the Bimetallic Controversy and The Theory of Interest” (1896)

[14] Grieve, Roy. “Keynes, Sraffa and the Emergence of the General Theory: Some Thoughts” (2008).

[15] Keynes, John M. The General Theory Of Employment, Interest and Money (1936) page 202.

[16] This would not be the last time that keynesians “take” an idea from the proto-monetarist Irving Fisher. In 1973 The Journal of Political Economy reprinted a 1926 paper of Fisher called "A Statistical Relation between Unemployment and Price Changes" but changing its name suggestively to “I Discovered the Phillips Curve: A Statistical Relation between Unemployment and Price Changes”. This was a clear allusion to the keynesian “Phillips Curve”. In this way monetarists were remembering to the academia who was the real creator of that curve. See Leeson, “Fisher and Phillips” (1995).

[17] Keynes, John M. “The Pure Theory of Money: A Reply to Dr. Hayek” (1931). Keynes was not alone. A contemporary proto-monetarist like Hawtrey also had serious difficulties due to his non-comprehension of capital and interest theory. Hawtrey complains that Prices and Production was “so difficult and obscure that it is impossible to understand [its] 112 pages except at the cost of many hours of hard work‟, and that, „this is not a necessary consequence of the difficulty of the subject, but that [Hayek] has been led by so ill-chosen a method of analysis to conclusions which he would hardly have accepted if given a more straightforward form of expression” Cord, Robert A. “The Keynesian Revolution: A Research School Analysis” (2009). And modern monetarists like Allan Meltzer also has similar coments. Huerta de Soto, Jesus. Money, Bank Credit and Economic Cycles (1998) page 524. However all they are in sharp contrast with Benjamin Anderson who, in Keynes’ times, knew monetary, capital and interest theory very well.

[18] Hazlitt, Henry. The Failure of the “New Economics” (1959) pages 12 and 55.

[19] Grieve, Ibid.

[20] Kurz, Heinz D. “Sraffa’s Reception of the German Economics Literature: A Few Examples” (2000).

[21] Hülsmann, Mises: The Last Knight of Liberalism (2007) pages 253, 779-781.

[22] Salerno, Joseph. Money, Sound and Unsound (2010) page 83.

[23] Cochran, John P. “Capital, Monetary Calculation, and the Trade Cycle: The Importance of Sound Money” (2004).

[24] Mises, Money, Method, and the Market Process (1990) page 65.

[25] Mises, Ludwig von. The Causes of the Economic Crisis (1978) pages 74-75.

[26] Festré, Agnés. “Knut Wicksell and Ludwig von Mises on Money, Interest, and Price Dynamics” (2006).

[27] Mises, Ludwig von. Human Action (1949) pages. 263-64, 523-24.

[28] Mises, Ibid. (1949) pages 512.

[29] Festré, Agnés. “Knut Wicksell and Ludwig von Mises on Money, Interest, and Price Dynamics” (2006) and “Knowledge and Individual Behaviour in the Austrian Tradition of Business Cycles: von Mises vs. Hayek” (2003).

[30] Mises, Ibid. pages 535, 539, 542- 545, 455-56, 529, 531, 533

[31] “These data, however, are no longer identical with those that prevailed on the eve of the expansionist process. A good many things have changed. Forced saving and, to an even greater extent, regular voluntary saving may have provided new capital goods which were not totally squandered through malinvestment and overconsumption as induced by the boom. Changes in the wealth and income of various individuals and groups of individuals have been brought about by the unevenness inherent in every inflationary movement.” Mises, Ibid. page 560.

[32] “Now, in extending circulation credit, the banks do not proceed by pumping a limited dosage of new fiduciary media into circulation and then stop. They expand the fiduciary media continuously for some time, sending, so to speak, after the first offering, a second, third, fourth, and so on. They do not simply undercut the “natural interest rate” once, and then adjust promptly to the new situation. Instead they continue the practice of making loans below the “natural interest rate” for some time. To be sure, the increasing volume of demands on them for credit may cause them to raise the “money rate of interest.” Yet, even if the banks revert to the former “natural rate,” the rate which prevailed before their credit expansion affected the market, they still lag behind the rate which would now exist on the market if they were not continuing to expand credit. This is because a positive price premium must now be included in the new “natural rate.”” Mises, The Causes of the Economic Crisis (1978) page 113 and in Human Action page 551: “If the credit expansion consists merely in a single, not repeated injection of a definite amount of fiduciary media into the loan market and then ceases altogether, the boom must very soon stop... Prices, wage rates, and the various individuals’ cash holdings are adjusted to the new money relation; they move toward the final state which corresponds to this money relation, without being disturbed by further injections of additional fiduciary media. The rate of originary interest which is coordinated to this new structure of the market acts with full momentum upon the gross market rate of interest. The gross market rate is no longer subject to disturbing influences exercised by cash-induced changes in the supply of money (in the broader sense).” Why does it happened? “The boom can last only as long as the credit expansion progresses at an ever accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly.”

[33] Human Action page 549, 577-78.

[34] What does “process of adjustment” mean? “Every change in the market data has its definite effects upon the market. It takes a definite length of time before all these effects are consummated, i.e., before the market is completely adjusted to the new state of affairs… each change in the data has its own course, generates certain reactive responses on the part of the individuals affected and disturbs the relation between the various members of the market system even if eventually no considerable changes in the prices of the various goods and no changes at all in the figures concerning the total amount of capital in the whole market system result” Human Action page 648.

[35] Mises, Ibid. page 326.

[36] If you think that equilibrium is just a neo-classical feature, maybe you should think again. Some writers think that sraffian economics is just another type of general equilibrium. “Nuti has recently characterized the approach of Sraffa and others as "a general equilibrium approach with the preference side chopped off." And he argued that "the approach...has no overwhelming advantages over the general equilibrium approach" (Dominco Mario Nuti, "On the Rates of Return on Investment," Kyklos 27 [1974]: 357). Nuti likewise identifies the Sraffa approach as "'classical'" (Nuti, 357-58).”… “The theoretical connection between Ricardian classical political economy and Walrasian neoclassical economics has been recently noted by Robert Eagly: "Janus-like, the Walrasian system is situated between two great systems of economic theory. It forms the capstone to classical theory on the one side, and on the other the cornerstone to the modern post-classical theory. It provided answers to questions posed by the normal progression of theoretical inquiry within the classical framework. But at the same time it posed new questions that were to occupy the attention and time of economists during the following century" (Eagly, Structure of Classical Economic Theory [New York: Oxford University Press, 1974], p. 134).”… “The analysis of the previous chapter provides the basis for a diagnosis. Ricardian economics is an unsatisfactory theory because of its inability to explain demand or short-run pricing. Even its long-run value is marred, dependent as it is on a materialist conception of costs. In the Ricardian analysis, costs depend on "the ultimate conditions on which nature yields her stores." It was from this materialist conception of costs that subjectivist neoclassical economics was to emancipate us. This Ricardian conception is not entirely consistent with a thorough-going subjectivist cost theory, in which a cost is a forgone utility. Once again, the forgoing in no way subtracts from Ricardo's many valuable contributions, not the least of which is the concept of the margin.” See O'Driscoll, Gerald. Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek (1977). Actually, according to Skousen, it is as unreal as Samuelson’s neoclassical presentation: “What is it? Paul Samuelson calls it “abstract methodology” (Samuelson 1962: 8). Ronald Coase names it “blackboard economics” (Coase 1992: 714). Simply put, it is the chronic divorcing of theory and history. It is stripping economics of the past, present, or future. It is pure deductive reasoning and high mathematical formulas without reference to history, sociology, philosophy, or the institutional framework. It is abstract thinking and model building using unrealistic and even false assumptions. Take a look at Samuelson’s Foundations of Economic Analysis (1947) or neo-Ricardian Piero Sraffa’s Production of Commodities by Means of Commodities (1960). Samuelson’s book is practically nothing but differential equations and assumptions far removed from reality. Sraffa’s work has hardly a single sentence that refers to the real world (see the box on Sraffa, page 108). They are both very much in the tradition of Ricardo.” … “Sraffa used a Ricardian “corn” model, with severely limited assumptions of homogeneous labor, a single commodity, and a single production technique. There are no references to demand, prices, or human action. Everything is mechanical. Blaug concluded elsewhere, “Sraffa’s book is after all a perfect example of what some economists have come to believe is wrong with economics: there is hardly a sentence in the book which refers to the real world” (Blaug 1975: 28)… Sraffian economics is a strange mixture of Ricardo, Marx, and Keynes, in the end rejecting orthodox neoclassical economics, the theory of consumer demand, and marginal utility. It is an ideal document for wholesale government interventionism and totalitarian central planning. Needless to say, Sraffian economists represent a very small percentage of the economics profession.” (Italics, bold and underlined are mine) Skousen, The Making of Modern Economics (2001) page 93, 108. Mark Blaug criticizes heavily Sraffa: in The Cambridge Revolution: Success or Failure? (1975), Economics Through the Looking Glass: The Distorted Perspective of the New Palgrave Dictionary of Economics (1988), “Misunderstanding Classical Economics: The Sraffian Interpretation of the Surplus Approach.” (1999), “Kurz and Salvadori on the Sraffian Interpretation of the Surplus Approach.” (2002), “The Trade-Off between Rigor and Relevance: Sraffian Economics as a Case in Point.” (2009) and finally Murphy, “Sraffa's Production of Fallacies by Means of Fallacies” (2004).

[37] Mises, The Causes of the Economic Crisis (1978) pages 109-10, 124, 120.

[38] Hauwe, Ludwig van den. “The Drama Revisited” (2000)

[39] Shenoy, Sudha. Towards a Theoretical Framework for British and International Economic History: Early Modern England. A Case Study. (2010) pages 250-51.

[40] Mises, Memoirs (1940) pages 46-47, 94.

[41] Money, Method and Market Process (1990) pages 69-70.

[42] Mises, Human Action pages 410-411, 552-53, 203, 395-396, 414-15, 539-40.

[43] Mises, Ibid. (1949) pages 257, 414,248, 250-51.

[44] Mises, The Causes of the Economic Crisis (1978) page 107.

[45] Mises, Ludwig von. Interventionism: An Economic Analysis (1940) page 43.

[46] Mises, Human Action (1949) page 789.

[47] Mises, Interventionism (1940) pages 42-43.

[48] Mises, The Causes of the Economic Crisis (1978) page 113.

[49] Mises, Human Action (1949) pages 555-56, 560-61.

[50] Mises, The Causes of the Economic Crisis (1978) pages 134, 150, 179, 186.

[51] Remember that Rothbard also makes a difference from Wicksell. For Rothbard the natural rate is that of the market without loan market i.e. only the rate of return of business: "Since Knut Wicksell is one of the fathers of this business-cycle approach, it is important to stress that our usage of “natural rate” differs from his. Wicksell’s “natural rate” was akin to our “free-market rate”; our “natural rate” is the rate of return earned by businesses on the existing market without considering loan interest. It corresponds to what has been misleadingly called the “normal profit rate,” but is actually the basic rate of interest."

[52] Rothbard, America’s Great Depression (1963) pages 33-34.

[53] Block, Walter. and Garschina, Kenneth M. “Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process” (1996).

[54] Mises, The Causes of the Economic Crisis (1978) page 109.

[55] Mises, Human Action pages 549-50.

[56] Mises, Planning for Freedom (2008) page 78-79. The article was written by him in 1965.

[57] Mises, The Causes of the Economic Crisis (1978) page 161.

[58] Mises, Ibid. page 194.

[59] By the way, if you are wondering: what does credit expansion means?: “In issuing fiduciary media, by which I mean bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably. The creation of these additional fiduciary media permits them to extend credit well beyond the limit set by their own assets and by the funds entrusted to them by their clients. They intervene on the market in this case as "suppliers" of additional credit, created by themselves, and they thus produce a lowering of the rate of interest, which falls below the level at which it would have been without their intervention…. Finally, it will be necessary to understand that the attempts to artificially lower the rate of interest which arises on the market, through an expansion of credit, can only produce temporary results, and that the initial recovery will be followed by a deeper decline which will manifest itself as a complete stagnation of commercial and industrial activity. The economy will not be able to develop harmoniously and smoothly unless all artificial measures that interfere with the level of prices, wages, and interest rates, as determined by the free play of economic forces, are renounced once and for all.” See Mises, “The Austrian Theory of the Trade Cycle” (1936).

[60] Huerta de Soto, Jesus. Money, Bank Credit and Economic Cycles (1998) page 349.