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Home | Mises Library | The Principles of Economics, With Applications to Practical Problems

The Principles of Economics, With Applications to Practical Problems

  • The Principles of Economics by Frank Fetter
July 20, 2005

Tags Austrian Economics OverviewCapital and Interest Theory

Frank Fetter's 1904 treatise, Principles of Economics, virtually impossible to find prior to this online edition, constructed a general theory of economics in the Austrian tradition that went unsurpassed until Ludwig von Mises's treatise of 1940, Nationaloekonomie. Yet Fetter, an American Austrian long before the inter-war migration from Austria, has not received due recognition for his many contributions to the tradition.

Using the axiomatic-deductive method, he traced economic laws to individual human action, and demonstrated that just as the price of each consumer good is determined solely by subjective value, the rate of interest is determined solely by time preference. The rental price of each producer good is imputed to it by entrepreneurial demand and is equal to its discounted marginal value product. The capital value of each durable good is equal to the discounted value of its future rents. Fetter showed how this uniform, subjective theory of value implies the demise of socialist theories of labor exploitation, Ricardian theories of rent, and productivity theories of interest.

Building on his Austrian theory of capital, money, interest, and entrepreneurship, Fetter even developed a rudimentary theory of the trade cycle, arguing that the boom period is characterized by the artificial swelling of capital values as money and credit expand. The crisis follows when the inflation ceases which causes the mistaken capital values of the boom to suddenly correct downward and, in turn, results in the bankruptcy, unemployment, and retrenchment of the depression.

His work on capital and interest has yet to be surpassed or even fully appreciated, even by Austrians; much more than a correction of Eugen von Böhm-Bawerk's lapse into a productivity theory of interest, it is the foundation for all work on capitalization and the definitive refutation of the claim that productivity has any role in determining the interest rate.

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References

New York: The Century Co, 1905