Robert P. Murphy, “Is Keynes from Heaven or Hell,” 7 July 2011.The PhD is a study with three separate essays dealing with Austrian capital and interest rate theory. In the second essay, Murphy critiques the pure time preference theory of the interest rate (Murphy 2003: 58–126), and, in his third chapter, he supports a view of interest rates as purely monetary phenomena (Murphy 2003: 127–177).
In taking a monetary theory of the interest rate, Murphy is far closer to Keynes than the views of many of his fellow Austrians, and indeed in his blog post above he cites Keynes’ remarks on interest in Chapter 13 of the General Theory with measured approval (Robert P. Murphy, “Is Keynes from Heaven or Hell,” 7 July 2011).
Murphy’s PhD is also worth reading in its own right. Some highlights follow.
On p. 107 (n. 33), Murphy identifies some hypocrisy from Henry Hazlitt, who had condemned Keynes’s concept of “own rates of interest” as a “strange” idea and “nonsense,” even though Rothbard uses a similar concept in his analysis of interest in capital goods markets. Murphy contends that the pure time preference theory of interest rates “encourages exactly the type of thinking that Hazlitt finds so absurd” (Murphy 2003: 107, n. 33).
From pp. 100–107, one can read Murphy’s critique of the idea that a uniform rate of originary interest would arise amongst all individuals and in goods markets.
It is only in the imaginary “evenly rotating economy” (ERE), a stationary general equilibrium with “a world of certainty and unchanging conditions over time” (Murphy 2003: 103), that a uniform rate of originary interest would emerge. In a dynamic general equilibrium the uniform rate need not emerge.
Here Murphy invokes the Hayek–Sraffa exchange, and Ludwig Lachmann’s possible solution to the problem of the unique natural rate:
“What is much less clear to us is to what extent Hayek was aware that by admitting that there might be no single rate he was making a fatal concession to his opponent. If there is a multitude of commodity rates, it is evidently possible for the money rate of interest to be lower than some but higher than others. What, then, becomes of monetary equilibrium?” (Lachmann 1994: 154).Murphy rejects Lachmann solution:
“It is not difficult, however, to close this particular breach in the Austrian rampart. In a barter economy with free competition commodity arbitrage would tend to establish an overall equilibrium rate of interest. Otherwise, if the wheat rate were the highest and the barley rate the lowest of interest rates, it would be profitable to borrow in barley and lend in wheat. Inter-market arbitrage will tend to establish an overall equilibrium in the loan market such that, in terms of a third commodity serving as numéraire, say steel, it is no more profitable to lend in wheat than in barley. This does not mean that actual own-rates must all be equal, but that their disparities are exactly offset by disparities between forward prices. The case is exactly parallel to the way in which international arbitrage produces equilibrium in the international money market, where differences in local interest rates are offset by disparities in forward rates” (Lachmann 1994: 154).
“Lachmann is defending Hayek from Sraffa’s claim that there is no reason for a unique ‘natural rate of interest.’ But Sraffa’s whole point was that there are, in principle, just as many natural rates as commodities; the fact that the rates in terms of any one commodity, such as steel, must be equal does not rescue Hayek. (One cannot explain the trade cycle as a deviation of the money rate of interest from ‘the’ natural rate of interest if the rate calculated in terms of steel is different from the natural rate calculated in terms of copper.) … arbitraging alone will not establish a unique real rate of interest in the way Lachmann seems to think.” (Murphy 2003: 102, n. 27).According to Murphy, arbitrage would not lead to equalization of natural rates. As far as I can see, Murphy does not explore the consequences of this for the Hayekian versions of the Austrian trade cycle theory: if there is no unique natural rate of interest or tendency for such a unique rate, what becomes of the theory? This was the point of Sraffa’s critique of Hayek’s Prices and Production (Sraffa 1932a and 1932b).
Murphy concludes that interest is “quite simply the price of borrowing money or (what is the same thing) the exchange rate of present versus future money units” (Murphy 2003: 176).
BIBLIOGRAPHY
Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
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.
Whoa, didn't expect this, but I was reading his thesis this days also. I think Murphy is quite right in his rejection of the pure rate of interest as explained by Mises and his followers. The theory of interest is a great divide between the different economic thinking schools. Do you support the Keynes idea of interest rate as liquidity preference?
ReplyDelete"if there is no unique natural rate of interest or tendency for such a unique rate, what becomes of the theory?"
ReplyDeleteSraffa's criticism is refuted by Hayek.
http://www.jstor.org/pss/2223821
Very good find.
ReplyDeleteIf you had to rank Austrian School scholars based on how fair and balanced they are, where would Lachmann and Murphy be?
Keynes was right that only a monetary theory of the interest rate is workable: all the "real" (natural interest rate, pure TP theory, originary interest etc) theories are untenable.
ReplyDeleteThe modern Post Keynesian position is that, while liquidity preference per se is right, Keynes' actual "liquidity preference theory of the interest rate" is problematic:
(1) in the General Theory, Keynes assumes an exogenous money stock: modern Post Keynesian economics holds that we have an endogenous broad money stock.
(2) modern Post Keynesian theory holds that in modern capitalist economies the central bank sets the interest rate as an exogenously determined variable: the central bank sets the base rate (e.g., the federal funds rate). Now liquidity preference does not really apply to the determination of the base rate, but will apply to other rates such as the yields on short and long term government bonds.
Wray (1990) shows how liquidity preference is compatible with endogenous money theory.
Wray, L. R., 1990, Money and Credit in Capitalist Economies: The Endogenous Money Approach, E. Elgar, Aldershot, Hants, England and Brookfield, Vt., USA.
"If you had to rank Austrian School scholars based on how fair and balanced they are, where would Lachmann and Murphy be?"
ReplyDeleteFairly high. Lachmann higher than Murphy.
Murphy's stock has gone up alot since I have read most (though not all) of his PhD.
How can Murphy accept Hayekian ABCT (in, say, the classic work Prices and Production) after understanding that Sraffa's critique of Hayek is valid?
Perhaps the Wicksellian (real) natural rate is transformed into some kind of market-clearly monetary rate (which Garrison seems to imply sometimes, at least in my reading of him). But it's all rather mysterious.
Actually Lachmann's admission that Keynesianism will probably work in periods of severe depression is very significant, to my mind.
ReplyDeleteMeng Hu,
ReplyDeleteYou cite this:
Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.
That reply does not - repeat, not - refute Sraffa. In fact, it is a devastating concession by Hayek:
“Mr. Sraffa denies that the possibility of a divergence between the equilibrium rate of interest and the actual rate is a peculiar characteristic of a money economy. And he thinks that ‘if money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might, at any moment, be as many “natural” rates of interest as there are commodities, though they would not be equilibrium rates.’ I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many 'natural' rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest” (Hayek 1932).
In reply, Sraffa delivered the death blow:
“Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates’. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates” (Sraffa 1932b).
Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.
And Murphy is adamant that Lachmann's attempt to defend Hayek by invoking commodity arbitrage to equalise rates (he says "In a barter economy with free competition commodity arbitrage would tend to establish an overall equilibrium rate of interest") will not work either:
ReplyDelete"But Sraffa’s whole point was that there are, in principle, just as many natural rates as commodities; the fact that the rates in terms of any one commodity, such as steel, must be equal does not rescue Hayek."
Hum, hum...
ReplyDelete"Let us take Mr. Sraffa's case in which the farmers "arbitrarily changed" the quantity of wheat produced - which I understand, from what follows, to mean that they, for example, 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."
This is very interesting and may place Bob slightly closer to mutualist thought (at least on this particular issue). The mutualist anarchist Pierre-Joseph Proudhon held an equivalent theory of interest to that of Keynes'. You may be interested in reading this article, LK:
ReplyDeleteDudley Dillard, “Keynes and Proudhon,” Journal of Economic History 2.1 (1942): 63-76.
I think one can interpret Proudhonian mutualism as a libertarian alternative to Keynesian economic policies.
Meng Hu,
ReplyDeleteI repeat: Hayek (1932) is a devastating concession.
Your quote does not address that.
What is it meant to prove? That in a barter economy an increase in the production of wheat will lead to more consumption of wheat?
What has this to do with the existence of multiple natural rates in a growing barter economy? Or that there can be no unique natural rate in a growing economy with money which a monetary/bank rate can equal?
"I repeat: Hayek (1932) is a devastating concession."
ReplyDeleteSo, that's the only thing you can do : quoting robertvienneau's blog. Without reading the document above. I must add : shame on you. Hayek pulverized Sraffa. But say what you want.
"What has this to do with the existence of multiple natural rates in a growing barter economy?"
It's very simple. Increasing supply of wheat will lower rate of interest on wheat-loans because its price falls. And because wheat prices fall, people will eat more of it, lowering consumption of other commodities, which in turn lower interest-loans on other commodities because there are more of it.
What are you even talking about?
ReplyDeleteI have not quoted "robertvienneau's blog" anywhere here at all.
I have read Hayek, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249, - and more than once, thank you.
"And because wheat prices fall, people will eat more of it, lowering consumption of other commodities, which in turn lower interest-loans on other commodities because there are more of it."
So you assume a world with market demand curves that always and necessarily slope downward? Another Austrian and neoclassical myth that is untenable:
"The “Law of Demand” is the proposition that, if a commodity’s price falls, the demand for it will rise. That sounds like a reasonable statement at first glance–and it will often be true in the real world. But it is an article of faith for economists that this is always true.
Ironically, neoclassical economists proved that this is in general not true. Even when you are working with individuals who all individually have what economists call “well behaved” preferences, and for whom individual demand curves can be derived that obey the “Law of Demand”, the market demand derived by summing these individual demands can have any shape at all.
If neoclassical economists took this neoclassical result seriously, then they would not draw “downward sloping market demand curves” in microeconomics–they would instead draw squiggly lines–and they wouldn’t use equilibrium “supply and demand” analysis."
And because wheat prices fall, people will eat more of it, lowering consumption of other commodities, which in turn lower interest-loans on other commodities because there are more of it. "
And why - even if this lowering did indeed happen - would ALL natural rates converge? If they were all quite different to begin with?
On demand curves:
ReplyDeletehttp://www.debtdeflation.com/blogs/2011/07/13/neoclassical-economists-dont-understand-neoclassical-economics/
And let's turn to an actual Austrian to see what Hayek's concession meant:
ReplyDelete“What is much less clear to us is to what extent Hayek was aware that by admitting that there might be no single rate he was making a fatal concession to his opponent. If there is a multitude of commodity rates, it is evidently possible for the money rate of interest to be lower than some but higher than others. What, then, becomes of monetary equilibrium?” Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London. p. 154.
Quite so: with no unique natural rate, what becomes of Hayek's foundational Wicksellian monetary equilibrium framework?
Lord Keynes,
ReplyDeleteYour quotes are exactly what I found from his blog, but nevermind.
"The “Law of Demand” is the proposition that, if a commodity’s price falls, the demand for it will rise. That sounds like a reasonable statement at first glance–and it will often be true in the real world. But it is an article of faith for economists that this is always true."
When prices go up, people consume less. When prices go down, people consume more. And that is wrong ? No, tell me. Are you serious ?
"If they were all quite different to begin with?"
All quite different "to begin with" ? No, you should re-read the citation above. And yes, I think all natural rates have a "tendency" to converge. If there is a large discrepancy between different natural rates, this means some type of commodities are abundant, and people consume more of these commodities, and less of rare commodities. Just as Hayek said in his paper.
The answer is that there is no equilibrium. Physics has long moved on from the theories that economics still tries to ape.
ReplyDeleteThe interest rate on a commodity is not the same as the interest rate on money, even if money is a commodity. The use of money is for intermediating not only the exchange of goods, but of assets and credit as well. Therefore the market for credit, in terms of borrowing and lending money, is much more liquid than the market for lending a non-money commodity (in the same way the market for selling money is more wide and deep than the market for selling non-money goods).
ReplyDeleteAnother consequence of a money economy is some degree of short run-price rigidities or stickiness.
These differences, if accepted, have consequences for monetary and interest rate theory. If these are accepted and used as assumptions, and if the monetary standard is a commodity like gold coin, the interest rate becomes the price of holding non-interest bearing base money rather than lending it to earn interest. The stock of base money under a commodity standard is fixed in the short run. Whatever the stock is at any point in time, it must be willingly held by someone. The interest rate rations the available stock to the demand to hold it.
Someone reads Rand.
Delete"the interest rate becomes the price of holding non-interest bearing base money rather than lending it to earn interest. "
ReplyDeleteThis statement appears to contradict itself.
"Your quotes are exactly what I found from his blog, but nevermind. "
ReplyDeleteWhat? The Sraffa quote? Does it not occur to you that I have Sraff's article and am perfectly capable of reading and quoting from it myself? (hint: yes to both questions).
"When prices go down, people consume more. And that is wrong ? No, tell me. Are you serious ?"
You aleady have the answer:
"Even when you are working with individuals who all individually have what economists call “well behaved” preferences, and for whom individual demand curves can be derived that obey the “Law of Demand”, the market demand derived by summing these individual demands can have any shape at all.
If neoclassical economists took this neoclassical result seriously, then they would not draw “downward sloping market demand curves” in microeconomics–they would instead draw squiggly lines–and they wouldn’t use equilibrium “supply and demand” analysis."
Clear to you? Yes, people often do in practise demand more of a commodidy when its price falls, but it is not necessarily and always so. A "market demand derived by summing these individual demands can have any shape at all."
If you hold gold coin, you get no interest, if you loan a gold coin to someone you earn interest. The opportunity cost of holding gold coin is interest foregone. The interest rate is the price or cost of holding gold coin. Under a gold coin standard of money, the interest rate must be explained in terms of the demand to hold gold coin rather than interest bearing demand deposits or similar securities.
ReplyDeleteSomewhat beside the point, but while Dudley Dillard's essay (“Keynes and Proudhon,” Journal of Economic History 2.1 (1942): 63-76) is extremely interesting, it does make the mistake of completely ignoring Proudhon's support for workers associations to replace wage-labour.
ReplyDeleteI discuss this in the section "On Credit" in my introduction to the new Proudhon Anthology Property is Theft!" (AK Press, 2011).
Iain
An Anarchist FAQ
Thanks for the kind words. Tomorrow I'll put up a paper I wrote for a Liberty Fund event, going over the Sraffa-Hayek debate.
ReplyDeletePrateek Sanjay,
ReplyDeleteRegarding the KIW blog: you are probably quite right.
Bob, your dissertation seems to be offline now. Will you fix that? I want to finish reading it!
ReplyDelete"Murphy's stock has gone up alot since I have read most (though not all) of his PhD. "
ReplyDeleteGone down any since then?
Crashed to near zero. lol
Delete