December, 2015

Austrian Calculus

Interest Rate and Allocation of Capital
  • Simon Bilo

    Assistant Professor of Economics, Allegheny College
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Continure reading at SSRN. 

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.