Austrian Calculus: Interest Rate and Allocation of Capital

8 Pages Posted: 30 Dec 2015

Date Written: December 28, 2015

Abstract

Economists contributing to the Austrian theory of capital use the theorem stating that a change in the real interest rate reallocates production factors. According to this theorem, a decrease in real interest rate shifts production factors into earlier stages of production and its increase shifts them to later stages. While authors working in the Austrian tradition use the theorem, they do so without providing a formal proof of the theorem, which makes their results less compelling. I fill this gap in the literature.

Keywords: Austrian capital theory; Factor allocation; Hayek; Structure of production

JEL Classification: E14, C65

Suggested Citation

Bilo, Simon, Austrian Calculus: Interest Rate and Allocation of Capital (December 28, 2015). Available at SSRN: https://ssrn.com/abstract=2708877 or http://dx.doi.org/10.2139/ssrn.2708877

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