Ludwig von Mises Built His Business Cycle Theory on Three Previously Unconnected Elements

He built his great business cycle theory on three previously unconnected elements. One was the Ricardian demonstration of the way in which government and the banking system habitually expand money and credit, driving prices up (the boom) and causing an outflow of gold and a subsequent contraction of money and prices (the bust). Mises realized that this was an excellent preliminary model, but that it did not explain how the production system was deeply affected by the boom or why a depression should then be made inevitable. Another element was the Böhm-Bawerkian analysis of capital and the structure of production. A third was the Swedish “Austrian” Knut Wicksells’ demonstration of the importance to the productive system and to prices of a gap between the “natural” rate of interest (the rate of interest without the interference of bank credit expansion) and the rate as actually affected by bank loans.

--Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 21-22.