Dangers of the one-good model: Böhm-Bawerk’s critique of the “naïve productivity theory of interest”

This paper will attempt to illustrate Böhm-Bawerk’s arguments through a simple, general equilibrium model in which the capital good is distinct from the consumption good. We will see that the standard one-good model of neoclassical growth theory obscures the subtleties in Böhm-Bawerk’s critique. Only in a model with multiple goods can one fully appreciate the “Austrian” approach to capital and interest theory.