Murphy points out the following:
“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 ) 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 then discusses Lachmann’s (1994: 154) solution to Sraffa’s critique, but finds it wanting:
Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 ) continued to talk of “the” originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 ) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).
“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to “the” real rate of interest.”On p. 14, Murphy states what I have already argued elsewhere: that Mises’s originary interest rate (a pure time preference theory of interest) becomes the “natural” rate imagined in Misesian versions of the trade cycle theory.
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).
On pp. 19–23 in a simple model, Murphy provides his attempt to show how an inflationary increase in the money supply can cause “people in earlier periods to consume too much,” and his analysis in the (simple) model is fine, as far as it goes. But even he admits this is “not really an illustration of the Misesian trade cycle theory,” because his model does not “really exhibit malinvestments in longer production processes.” Murphy leaves the creation of such a model for his future research.
Murphy’s conclusions are significant:
“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to “the” natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below “the” natural rate, because there is no such thing. Yet the basic Misesian analysis still holds true, that the bankers have suddenly augmented the purchasing power of one segment of the population, which not only redistributes real wealth but also leads to distorted money prices and more mistakes than otherwise would have occurred.”So Murphy has dispensed with the Wicksellian natural interest rate concept, but still thinks a Misesian boom-bust cycle can occur. But this of course raises the following questions:
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).
(1) Fractional reserve banking has always redistributed “real wealth” to those who first receive loans: usually it goes to capitalists who increase investment, employment and output to make us wealthier. Why is this a bad thing? Even loans extended under a pure gold standard would redistribute “real wealth” to the first holders of the money: the issue is whether real resources are available.At any rate, I am impressed with this paper by Murphy. Though I have not become a convert to ABCT, without any doubt Murphy’s paper is the best attempt to improve and build on the Austrian trade cycle theory I have seen in a long time.
(2) What happens when new fiduciary media or fiat money can simply use idle resources, such as unemployed labour, unused stocks of raw materials, idle capital goods and other factor inputs?
(3) What happens when fiduciary media or fiat money can simply be used to import the relevant factor inputs through international trade, and these factor inputs are not scarce?
(4) Even when domestic factor inputs become scarce and an economy runs at full employment, and inflationary pressures build up, this is exactly the time when Keynesian macroeconomic policy has measures to deal with the boom: a contraction in demand to free up real resources for a further growth cycle.
Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”