Static Tools for Dynamic Analysis: Ludwig v. Mises's Business Cycle Theory

Abstract:     
This article discusses Ludwig von Mises’s attempt to frame his business cycle analysis by an essentially stationary apparatus. It pays special attention to his choice to take sides with Frank Fetter (1902) and his theory of interest and highlights some unpleasant consequences for his study of monetary dynamics. The article provides a simple model to depict and clarify Mises’s major shortcomings in real analysis. It is shown that in Human Action, his magnum opus first published in 1949, Mises has fallen far behind the frontiers of economic analysis, including major contributions of economists within or close to the Austrian tradition, like F.A. Hayek and Knut Wicksell. Of course, problems associated with the immense task of integrating money into real accumulation processes are numerous. Neither Mises’s contemporaries, nor modern economists, have found satisfactory solutions. The particular significance of Mises idiosyncratic framework is due to the fact that his major prediction – any money-induced traverse necessarily reverses - ultimately depends on his barren analytical device. This prediction proves little robust in the light of even small variations of the underlying framework.

Keywords: Mises, Austrian business cycle, general equilibrium, traverse, forced saving, time preference

JEL Classification: B14, B22, B31, B53

Accepted Paper Series