If we want to understand why Hayekian versions of the Austrian business cycle theory (ABCT) fail, the Sraffa-Hayek debate is the place to start. I will start a bibliography here and update it.
The exchange itself began with Sraffa’s (1932a) review of Hayek’s Prices and Production (London, 1931), then Hayek’s (1932) reply, and Sraffa’s (1932b) response.
Lachmann (1994: 154) is an Austrian attempt to answer Sraffa on the multiple natural rates issue, but Murphy (in “Multiple Interest Rates and Austrian Business Cycle Theory”) has essentially admitted defeat on the issue of the existence of an unique natural rate of interest.
Many other Austrians, however, continue to use the unique natural rate concept in discussions of ABCT, and this is one of the major flaws in the theory.
BIBLIOGRAPHY
Bellofiore, R. 1998. “Between Wicksell and Hayek: Mises’ Theory of Money and Credit Revisited,” American Journal of Economics and Sociology 57.4: 531–578.
Burger, P. 2003. Sustainable Fiscal Policy and Economic Stability: Theory and Practice, Edward Elgar, Cheltenham, UK.
Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London.
Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,” Cambridge Journal of Economics 18: 197–212.
Harcourt, G. C. and P. A. Riach. 1997. A “Second Edition” of The General Theory (Vol. 1), Routledge, London.
Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.
Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.
Hayek, F. A. von, 1935. Prices and Production (2nd edn), Routledge and Kegan Paul.
Hicks, J. R. and J. C. Gilbert. 1934. Review of Beiträge zur Geldtheorie by F. A. von Hayek, Economica n.s. 1.4: 479–486.
Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective Cambridge University Press, Cambridge. p. 36ff.
Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics, Cambridge University Press, Cambridge. 257-302.
Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242. [reprinted in Lachmann 1994: 141-158.]
Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London. 141-158.
Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.
Lawlor, M. S. 1994. “The Own-Rates Framework as an Interpretation of the General Theory: A Suggestion for Complicating the Keynesian Theory of Money,” in J. B. Davis (ed.), The State of Interpretation of Keynes, Kluwer Academic, Boston and London. 39–90.
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
Myrdal, G. 1965 [1939]. Monetary Equilibrium, Augustus M. Kelly, New York.
Milgate, M. 1979. “On the Origin of the Notion of ‘Intertemporal Equilibrium,’” Economica n.s. 46.181: 1–10.
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.
"Many other Austrians, however, continue to use the unique natural rate concept in discussions of ABCT, and this is one of the major flaws in the theory."
ReplyDeleteHmm... I cannot believe you really read hayek's paper. So I'll refresh your memory :
"...so increased the supply of wheat that its price fell below its cost of production and, as a consequence of its temporary abundance, loans of wheat were made at a much lower rate of interest than loans of other commodities. But would that fall in the rate of interest on wheat-loans cause anyone to start roundabout processes of production for which the available subsistence fund is not sufficient ? There is no reason whatever to assume this. In so far as people live on wheat, they will actually be provided with food for a longer period; and in so far as the lower price of wheat will induce people to eat more of it – instead of something else – these other goods will also be available for a longer period of time, and interest in terms of these goods will also fall. The effects will be just the same as if a corresponding amount of wheat had been saved, and when, as a consequence of the fall in the price of wheat, its output falls again, the accumulation of capital made possible by the surplus of wheat will supply cease."
And he concludes :
"The case would, however, be different if the actual supply of wheat were not changed, but if, under the mistaken impression that the supply of wheat would greatly increase, wheat dealers sold short greater quantities of future wheat than they will actually be able to supply. This is the only case I can think of where, in a barter economy, anything corresponding to the deviation of the money rate from the equilibrium rate could possibly occur."
The result would be different only on condition that investors are caught in the illusion that there are more wheat than actually available. In a regulated monetary economy, where a central bank arbitrarily manipulates the supply of money, this can occur at any time. But it is unclear how, in a barter economy, such a distortion of the temporal horizon, and thus the structure of production, could occur. That there are one or more equilibrium rate does not change anything to the premise. In a barter economy, economic agents do not invest more than the amount of their economies (wheat and other commodities), which are not disproportionately misallocated to the higher stages of production. And this because all commodities are real economies, real subsistence fund. Sraffa completely missed that point.
The point of Hayek's theory is to explain how in a monetary economy the bank/market rate of interest (a monetary rate) falls below the natural rate (a real rate).
ReplyDeleteHow can a bank rate fall below a natural rate, when there is no such thing as a unqiue natural rate?
Try reading the Austrian Murphy:
"“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it."
Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12.
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
"How can a bank rate fall below a natural rate, when there is no such thing as a unqiue natural rate?"
ReplyDeleteYou missed the point, again. What i'm saying is : "That there are one or more equilibrium rate does not change anything to the premise. In a barter economy, economic agents do not invest more than the amount of their economies (wheat and other commodities), which are not disproportionately misallocated to the higher stages of production. And this because all commodities are real economies, real subsistence fund."
Perhaps Hayek was wrong, and there are indeed a multiplicity of interest rates. Then I must add : "so what ?"
Commodities = economies, savings. That's all.
(1) We don't live in a barter economy, and to do so would mean dismantling modern capitalism
ReplyDelete(2) we live in a money-using economy; there is no such thing as a unique natural rate in a growing, real world economy: therefore the whole basis of Hayek's ABCT collapses: these cycles can't be caused by the real-world bank rank falling below some unique natural rate.
This is admitted by Murphy.