II. Macroeconomics, Inflation, Business Cycles The Concept of the Natural Rate of Interest in Mises and Hayek
At the crux of the Mises-Hayek, or Austrian, theory of the business cycle is the idea of the money loan rate of interest diverging from the natural or originary rate. But, as is shown in this paper, the meaning of the concept is not clear. This paper draws on Mises's and Hayek's writing to clarify the meaning of the natural rate and to provide an assessment of the concept. One of the conclusions reached is that Mises and Hayek have different concepts of natural or originary interest. Hayek takes the more traditional definition of natural interest as being the equilibrium value difference between output and input. Mises, while accepting this traditional notion of natural interest in the Theory of Money and Credit, breaks from it in Human Action and introduces the concept of originary interest as the value difference between present and future goods.