Neoclassical economics on the edge: Fisher, Knight, and the theory of interest in the 1930s

Irving Fisher and Frank Knight had a brief exchange on the former's "The Theory of Interest", published in 1930, which culminated in a full book review by Knight in 1931. We assess the episode by recasting Fisher's interest theory as a maximisation under constraint calculation. After that, Knight's objections to subjective time preference are examined, as well as his ensuing attack on the Austrian School's definition of capital. Fisher's and Knight's reflections on business cycles, grounded on expectations, delays, and speculation, are assessed in sequence. We conclude by indicating some limitations of the theories of interest formulated by both economists.