Mises ERE, "market power" and interest rates

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    I’ve just finished watching Peter Klein’s Austrian Microeconomics lecture series in the Mises Academy and I have some questions about Mises’s concept of the Evenly Rotating Economy (ERE) and how it works in the presence of a “monopoly” firm (a firm with market power, not a monopoly in the austrian sense).

    Mises uses this imaginary tool of the ERE to distinguish profit from the interest. Considering an equilibrium in the structure of production, all the interest rates between the diferent stages should be same -‘ the natural rate of interest’.

    But in the presence of a firm with market power (which in microeconomic terms is not a problem) there seems to be room for a slight profit, beyond the equilibrium interest rate, right? Wouldn’t that screw the equilibrium in the structure of production and the possibility of a natural interest rate. Or in the Mises ERE we considerer that these diferences in profits also don’t exist – are somehow equilibrated .


    Contra neoclassical economists, Mises points out the the only significance of the term “monopoly” is a case in which an entrepreneur has exclusive ownership over the supply of an input. Then, Mises argued, it’s possible for the entrepreneur to charge a monopoly price, i.e., a price above competitive level. This higher price, however, does not result in profit or higher rates of return. Instead, outside investors will bid up the price they are willing to pay to buy the monopolized input or, alternatively, the entrepreneur’s entire firm. This raises the cost structure of producing with the monopolized input which eliminates profit and brings the rate of return into conformity with other lines of production. The value of the monopoly ownership of an input is capitalized into the the price of the input itself. So the monopolist gets the benefit of owning a more valuable asset, but not monopoly profit.

    Take a look at the section on “monopoly prices” in chapter 16 in Ludwig von Mises’s book, Human Action:


    In the neoclassical case of a entrepreneur having market power, the adjustment process of the market works to raise production costs and eliminate any higher rate of return. The entrepreneur with market power competes for inputs with all other entrepreneurs. So if he bids more intensely to buy inputs and pushes up their prices, his profit is eliminated and the production of other entrepreneurs will shrink until the prices of their output rise to the point of restoring the common rate of return in their lines of production. If the entrepreneur with market power does not bid more for inputs, then outside investors will bid up the value of his assets, raising his production costs and eliminating his profit. The higher prices for these assets will cause other entrepreneurs who use them to cut back production leading to a higher price for their output and a restoration of the common rate of return in their lines of production.

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