“Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.This passage illustrates a fundamental reason why Sraffa’s critique of Hayek was so important. In Sraffa’s analysis of Hayek’s theory, we see that
Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices; …” (Hayek 2008 [1935]: 215).
(1) the relevant market for the “demand for and the supply of capital” is the market for capital goods. Depending on how one defines “saving” (see Pollin 2003: 304–308) and “investment,” the demand for capital that is met results in investment (if savings is defined simply as “income not spent,” savings can exceed investment when money or even goods are held without lending for capital goods investment).BIBLIOGRAPHY
(2) By the words“because the demand for and the supply of capital do not meet in their natural form but in the form of money,”Hayek is referring to the idea of loans being made in natura (in real commodities), as opposed to in money terms.
(3) A state where loans are made in in natura is a barter state (or, more correctly, a credit/debt transaction where real goods are lent out and repayed with interest with some other goods later). What would a rate of interest be when loans are made in goods? The rate of interest would be the rate on loans of a physical commodity or commodities (Sraffa 1932: 49–51). In a world of heterogeneous goods as factor inputs (including capital goods) which is out of equilibrium, there could be as many natural rates on each commodity considered as a factor input (or capital good) as there as such commodities (Barens and Caspari 1997: 288).
(4) Which one of these rates would in fact be the “natural rate”? There is no unique natural rate, but multiple rates. Any monetary rate could be both above and below a number of multiple natural rates, or, as Lachmann stated, “it is evidently possible for the money rate of interest to be lower than some [sc. multitude of commodity rates] but higher than others” (Lachmann 1994: 154). In short, one should agree with Robert P. Murphy, who concludes that “canonical ABCT does need to be updated, in light of a crippling objection raised early on by Piero Sraffa (1932a, 1932b) [my emphasis]” (see “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 1).
(5) It therefore makes no sense to speak of a monetary rate of interest diverging from the unique Wicksellian natural rate of interest (or what Hayek calls the equilibrium rate), because there is no such rate outside of an imaginary equilibrium position.
(6) If some average of multiple natural rates were constructed, would this get Hayek out of his conundrum? No. As Sraffa argued,“I pointed out that only under conditions of equilibrium would there be a single rate; and that when saving was in progress there would at any one moment be many ‘natural’ rates, possibly as many as there are commodities; so that it would be not merely difficult in practice, but altogether inconceivable, that the money rate should be equal to ‘the’ natural rate. And whilst Wicksell might fall back, for the criterion of his ‘money’ rate, upon an average of the ‘natural’ rates weighted in the same way as the index number of prices which he chose to stabilise, this way of escape was not open to Dr. Hayek, for he had emphatically repudiated the use of averages. 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: 251).Lachmann also noted that Wicksell’s natural rate could be interpreted as an average of actual own-rates in a barter economy (Lachmann 1978: 76–77), and later tried to defend the natural rate idea.
For Lachmann’s attempts to salvage the notion of a natural rate, see Lachmann (1978: 75–77) and Lachmann (1986: 225–242). See Robert P. Murphy (2003) and Murphy’s paper “Multiple Interest Rates and Austrian Business Cycle Theory” for why Lachmann’s solution does not work.
Barens, I. and V. Caspari, 1997. “Own-Rates of Interest and Their Relevance for the Existence of Underemployment Equilibrium Positions,” in G. C. Harcourt and P. A. Riach (eds.), A “Second Edition” of The General Theory (Vol. 1), Routledge, London. 283–303.
Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.
Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.
Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City. pp. 75–77.
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.
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.”
Pollin, R. 2003. “Saving,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Edward Elgar, Cheltenham, UK and Northhampton, MA, USA. 304–308.
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.
UPDATED BIBLIOGRAPHY ON THE HAYEK–SRAFFA DEBATE
Barens, I. and V. Caspari, 1997. “Own-Rates of Interest and Their Relevance for the Existence of Underemployment Equilibrium Positions,” in G. C. Harcourt and P. A. Riach (eds.), A “Second Edition” of The General Theory (Vol. 1), Routledge, London. 283–303.
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.
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.
Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective Cambridge University Press, Cambridge. p. 36ff.
Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City. pp. 75–77.
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.
Milgate, M. 1979. “On the Origin of the Notion of ‘Intertemporal Equilibrium,’” Economica n.s. 46.181: 1–10.
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.
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.
" the relevant market for the “demand for and the supply of capital” is the market for capital goods."
ReplyDeleteOh!! Thanks for making it clear that this is Sraffa's analysis of what Hayek said and not what Hayek said himself.
And this is one of the questions that I kept posing on the other thread (which you haven't posted but have attempted to reply to through this post of yours). What is the market for capital goods? Is it the loanable funds market or does it encompass the entire structure of production consisting of multiple stages of production, each conceptually owned by a different capitalist who has to advance present goods to owners of factors of production?
"Depending on how one defines “saving”"
Oh, come on!!! That's what I have been asking you. When Hayek says
" the rate of interest would be determined so as to equalize the demand for and the supply of savings"
what, according to you and Sraffa, is he talking of? Gross savings or net savings?
"Hayek is referring to the idea of loans being made in natura (in real commodities), as opposed to in money terms."
How did you interpret Hayek in this manner? I see it possible only if you limit the market for capital to the loanable funds market? This statement would be way off base if you include the entire structure of production in the market for capital.
"A state where loans are made in in natura is a barter state. In a barter state, what would a rate of interest be?"
This would then become a non-sequitur.
Thus, the rest of your (and Sraffa's) criticism would become nonsense on stilts. So, please do answer those basic questions that I am posing. I promise that it will not be a long drawn out affair. Once you answer them, I will be pretty quick at it.
>"Hayek is referring to the idea of loans
ReplyDelete> being made in natura (in real commodities), > as opposed to in money terms."
How did you interpret Hayek in this manner?
"because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks."
"In their natural form" means in natura.
""In their natural form" means in natura."
ReplyDeleteLaughable. In any case, please remember that it is YOUR (and Sraffa's) interpretation and not what Hayek said.
That apart, Hayek's statement can also be interpreted differently. What a capitalist needs is the services of various factors of production. But it is not necessary (and usually not possible) that he has the exact combination of factors of production that he requires to manufacture a particular quantity of a particular good. What he can do (which is one of the key services rendered by a generally accepted medium of exchange) is to use a certain amount of the money commodity to buy the services of the required factors as and when required.
Since the exact combination of factors in the exact quantities cannot be possessed, what capital may consist of is the quantum of the medium of exchange required to buy the services of that combination and quantity of factors of production. Thus, it appears quite a leap of (misplaced) faith and quite a bit of distortion to interpret it as "in the form of commodities". It should be "in the form of a particular combination of factors of production".
So you (and Sraffa) have completely misinterpreted Hayek and have attacked a straw-man version of ABCT.
That apart, I am still awaiting your answers to my other questions. Do give them and I will show you why you (and Sraffa) are talking nonsense on stilts.
"> "In their natural form" means in natura."
ReplyDeleteLaughable. In any case, please remember that it is YOUR (and Sraffa's) interpretation and not what Hayek said."
The in natura conception of Wicksell's natural rate is easily confirmed by Mises:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.”
(Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala. pp. 107–108).
That concept is taken over directly by Hayek.
Real goods does not mean commodities. It could mean anything including various capital goods and their services. It could include other factors of production as well. On what basis do you select particular commodities and exclude a whole host of other "goods"?
ReplyDeleteAnd the answers to the remaining questions are still awaited. Those are in fact more critical to show that you (and Sraffa) are talking nonsense on stilts.
I forgot to mention that "real goods" can include any and every consumers' good as well
ReplyDelete"It could include other factors of production as well. "
ReplyDeleteLOL.. of course it could. Hayek obviously is thinking of loans for factor inputs in general - as well as capital goods.
That doesn't affect my arguments above.
"What is the market for capital goods?"
ReplyDeleteThe market for capital goods/producers goods as one of the factor inputs. Of course, Hayek's ABCT includes factor inputs in general considered as resources necessary for investment.
As for saving, Hayek thinks of saving as delayed consumption. Savers are releasing resources for investment. This is a conception of savings in real terms, just as the "natural rate" is conceived in real terms (in natura). Savings in the sense of "delayed consumption" frees up resources for investment. Thus Hayek thinks of savings as deferred present consumption in favour of future consumption, where freed up resources expand the capital structure.
When banks issue fiduciary media they allegedly cause "forced saving".
Good. That's one small part answered. What about the remaining? What in your analysis does Hayek mean by the term 'savings'? Is it 'gross savings' or 'net savings'?
ReplyDelete"This is a conception of savings in real terms, just as the "natural rate" is conceived in real terms (in natura)."
This is not exactly correct when Hayek says that the demand and supply of capital meet not in their natural form but in the form of money. The best you can say is that Hayek identifies two possibilities.
1. the point where demand and supply would meet if they meet in their natural form being the same as the point where demand and supply meet as they actually do in the form of money, i.e., the case where the money available for investment is the same as the real resources that have been freed up for investment
and
2. the point where demand and supply would meet if they meet in their natural form being different from the point where demand and supply meet as they actually do in the form of money, i.e., the case where the money available for investment is more than as the real resources that have been freed up for investment.
Now, could we have the answer to the "savings" part please? Is it "gross savings" or "net savings"?
" The market for capital goods/producers goods as one of the factor inputs. Of course, Hayek's ABCT includes factor inputs in general considered as resources necessary for investment. "
ReplyDeleteGood to see this too. That takes us out of the silly and irrelevant "producers' loan market" into the production structure. Let's not lose track of this development. It means a lot in understanding your interpretation. I'll come back to this and put it all together once you answer the last question. Is the 'savings' as used by Hayek "gross savings" or "net savings"?
>"This is a conception of savings in real
ReplyDelete> terms, just as the "natural rate" is
> conceived in real terms (in natura)."
This is not exactly correct when Hayek says that the demand and supply of capital meet not in their natural form but in the form of money.
What I said is exactly what Hayek means by "demand and supply of capital meet not in their natural form." He simply takes over Wicksellian terms, that are explicitly stated by Mises:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.”
Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala. pp. 107–108.
You notice Mises's words: "by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money." Hayek is using the same Wicksellian theory.
You have not addressed this.
Part 1 of 2
ReplyDelete"You have not addressed this."
False. I have already broadened the scope of the term "goods" to include ALL GOODS and not just commodities as you (and Sraffa) did.
In any case, the Mises quote is an explanation of what he means by the natural rate of interest. The Hayek quote that you picked up, however, is this
"because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks."
which you have interpreted thus
"This is a conception of savings in real terms, just as the "natural rate" is conceived in real terms (in natura)."
This interpretation is completely flawed. The correct interpretation is as follows.
If capital were demanded and supplied in the form of real goods, we would see the demand and supply of capital meeting at the natural rate of interest. However, since in a money economy, they are not demanded or supplied in the form of real goods but rather in the form of money, the meeting point could be different from what it would be if capital were demanded and supplied in the form of real goods. This meeting point of the demand for and supply of capital in the form of money could be different from the meeting point of the same supply and demand for capital in the form of real goods. While the meeting point of demand and supply of capital in the form of real goods would set the natural rate of interest, the meeting point of demand and supply of capital in the form of money would set the money rate of interest. This money rate of interest COULD differ from the natural rate of interest. The reason for this is that banks are in a position to make more capital available in the form of money that would be available in the form of real goods in any society at any given point in time because they are in a position to create money out of nothing and inject it as capital into the structure of production.
End of Part 1
Part 2 of 2
ReplyDeleteThe reason you are wrong is the phrase preceding the quote you selected, which is
"In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate,"
Let me now explain why you are wrong. This is a complex sentence where the first part (just selected above) is the main clause whereas the subsequent part (which you highlighted) is the subordinate clause. That is indicated by the use of "because" which is a subordinating conjunction. This means that the way to interpret this sentence is to look at the subject, object and the finite verb in the main clause with the subordinate clause acting as the identified cause of the action/phenomenon being described in the main clause.
Looking at the main clause, we see its structure as follows.
"the actual or money rate of interest" - The subject of the clause
"may" - the modal that indicates the probability of the "action" defined by the following finite verb occuring
"differ" - the finite verb that tells us that the purpose of the clause is to describe the act of the subject differing from something else to be introduced.
"from" - the preposition that links the subject to the object (to be introduced) through the action described by the finite verb "differ". We may also note that, in general, "differ" is followed by "from"
"the equilibrium or natural rate" - the object to which the preposition from links the subject through the medium of the finite verb.
So, the Hayek statement from which you selected a portion is not an attempt to define a concept of savings, least of all savings "in natura", but an attempt to ASSERT that
1. there is a money rate of interest just as there is a natural rate of interest
2. that the former may differ from the latter
and then go on to identify the cause for this difference.
To call this a conception of savings in natural terms is really erroneous. Hayek's concept of savings is clearly in a monetary form but he also relates it to the hypothetical savings in the form of real goods to compare the money rate of interest with the natural rate of interest.
So, once again, is it "gross savings" or "net savings"?
End of Part 2
My 2 part explanation with the Hayek statement parsed should suffice to show why your interpretation is flawed and mine is correct.
ReplyDeleteHayek never uses the expressions "gross saving" or "net saving" in Prices and Production.
ReplyDeleteIf these terms are applied to saving in real terms, in the way Rothbard uses them in Man, economy, and state with Power and market: government and economy p. 518, they mean:
"gross saving"
goods not consumed in any given period.
"net saving"
Since savings in the barter world would, by defintion, not be held as money or used to but financial assets, net saving would be goods lent out for investment.
When saving equals investment in any given period, there would be equilibrium, in which Hayek's equilibrium interest rate "equalize[s] the demand for and the supply of savings."
Anyway, Hayek's relevant distinction is between "voluntary saving" and "forced saving".
"So, the Hayek statement from which you selected a portion is not an attempt to define a concept of savings,
ReplyDeleteCorrection:
I didn't say it was. I said his passage contains a part mentioning the Wicksellian notion of saving in real terms (in natura), as mentioned in the Mises quote above
but an attempt to ASSERT that
1. there is a money rate of interest just as there is a natural rate of interest
2. that the former may differ from the latter
and then go on to identify the cause for this difference."
LOL.. Exactly my interpretation, you idiot.
The point of the post above is review the concept of the unique "natural rate of interest", which, you agree, Hayek is referring to here.
"Anyway, Hayek's relevant distinction is between "voluntary saving" and "forced saving"."
ReplyDeleteWhere in the segment you have highlighted? I can only see him talking of money and natural rates of interest and banks lowering the money rate of interest by lending more than has been entrusted to them. Where is this "voluntary" and forced saving" from and why is that the "relevant" distinction and not what I have mentioned? I see the difference between money and natural rates of interest as more relevant to the portion you have highlighted.
"Where in the segment you have highlighted? I"
ReplyDeleteIn Prices and Production
"I see the difference between money and natural rates of interest as more relevant to the portion you have highlighted. "
ReplyDeleteIndeed, it is an important distinction for Hayek, which I have mentioned in the post above:
"It therefore makes no sense to speak of a monetary rate of interest diverging from the unique Wicksellian natural rate of interest (or what Hayek calls the equilibrium rate), because there is no such rate outside of an imaginary equilibrium position."
"The point of the post above is review the concept of the unique "natural rate of interest", which, you agree, Hayek is referring to here."
ReplyDeleteWhile Hayek does talk about the natural rate of interest, parsing the entire segment you have highlighted will show that his objective is not just to talk of the natural rate of interest but to highlight the process that causes a wedge between that and the money rate of interest. It is also to highlight that the concept of capital he uses in his theory of the business cycle is of capital in the form of money and not in the form of real goods. It looks like you missed that point badly.
"It is also to highlight that the concept of capital he uses in his theory of the business cycle is of capital in the form of money and not in the form of real goods."
ReplyDeleteOf course, Hayek is concerned also with monetary savings and a monetary interwst rate. LOL, where have I ever denied that?
It is not just an "imaginary equilibrium position". It is what would occur in the real world sans injection of credit through the creation of fiduciary media by the banks provided values, resources and technologies were to remain constant. As Hayek said, before we can talk of why things go wrong, we need to understand how and why they would work in the first place.
ReplyDeleteHayek's point, which you are missing badly, is that in the absence of money creation by banks and the concomitant credit injection, the money rate of interest would coincide with the natural rate of interest. At the very least, it would tend towards this value unless a new disturbance creates a new natural meeting point of the demand for and the supply of credit or a new natural rate of interest. The reason for this is the ease of arbitrage in the money economy where money capital can move from lines of production with lower price spreads (raising the price spread) to lines of production with greater price spreads (lowering the price spread). This process will end only when the money rate of interest in every line of production becomes the same as long as values, resources and technologies remain the same.
The reason it doesn't is the money creation and the credit injection. This is Hayek's point which you have absolutely failed to comprehend when you say
"It therefore makes no sense to speak of a monetary rate of interest diverging from the unique Wicksellian natural rate of interest (or what Hayek calls the equilibrium rate), because there is no such rate outside of an imaginary equilibrium position."
It makes enormous sense, except that economic chroniclers who can never get economic reasoning will never see the sense in it. It does not fit with their other fables.
"Of course, Hayek is concerned also with monetary savings and a monetary interwst rate. LOL, where have I ever denied that?"
ReplyDeleteOut here where you talk thus
" A state where loans are made in in natura is a barter state. In a barter state, what would a rate of interest be? The rate of interest would be the rate on loans of a physical commodity (Sraffa 1932: 49–51). In a world of heterogeneous capital goods out of equilibrium, there could be as many natural rates on each commodity considered as a capital good as there as such commodities (Barens and Caspari 1997: 288).
(4) Which one of these rates would in fact be the “natural rate”? There is no unique natural rate, but multiple rates. Any monetary rate could be both above and below a number of multiple natural rates, or, as Lachmann stated, “it is evidently possible for the money rate of interest to be lower than some [sc. multitude of commodity rates] but higher than others” (Lachmann 1994: 154). In short, one should agree with Robert P. Murphy, who concludes that “canonical ABCT does need to be updated, in light of a crippling objection raised early on by Piero Sraffa (1932a, 1932b) [my emphasis] ”
Hayek is talking ONLY OF the monetary rate of interest and hence to talk of rates of interest in terms of various commodities is utterly vacuous. The price spread in every line is the money rate of interest for that commodity. However, the non-specific character of money presents arbitrage opportunities that would equalise the money rate of interest across all lines of production at equilibrium.
When it does, it would equal the natural rate of interest provided banks have not loaned out more than they have been entrusted with. If they do loan out more, it would differ.
This is Hayek's point. Thus, you (and Sraffa) have completely failed to make the slightest of dents in Hayek's theory.
"Hayek's point, which you are missing badly, is that in the absence of money creation by banks and the concomitant credit injection, the money rate of interest would coincide with the natural rate of interest"
ReplyDeleteThere is no unique natural rate of interest.
"Hayek is talking ONLY OF the monetary rate of interest and hence to talk of rates of interest in terms of various commodities is utterly vacuous."
You admit above Hayek says "there is a money rate of interest just as there is a natural rate of interest". So you've just descended into garbage.
"However, the non-specific character of money presents arbitrage opportunities that would equalise the money rate of interest across all lines of production at equilibrium."
That has already dealt with by Murphy:
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
Murphy, who is right:
ReplyDelete“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).
Murphy then discusses Lachmann’s (1994: 154) proposed solution:
“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.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).
"You admit above Hayek says "there is a money rate of interest just as there is a natural rate of interest"."
ReplyDeleteBut Hayek makes the point (and I identified it clearly) that it plays out only in the form of money in the real world while the natural rate of interest exists in the hypothetical world where capital is in the form of real goods. Why do you omit that?
I think I can see where Murphy is wrong (and where Lachmann is too). The issue is not of a numeraire but of the fact that the money rate of interest would equalise ACROSS ALL LINES OF PRODUCTION. By identifying intertemporal equilibrium, Murphy seems to be making the mistake of ignoring the equalisation of price spreads across all lines of production. Murphy, contrary to what you are claiming, is NOT addressing my point.
ReplyDeleteThanks for helping me understand exactly where Murphy is going wrong. I was always uncomfortable with his position on this issue. Talking to you has helped me understand his error. I will take it up with him rather than argue with you on that.
ReplyDeleteI just went through Murphy's thesis with this understanding and realised that he has screwed up completely on Page 5 itself. So it does not surprise me that he has it all wrong on page 14.
ReplyDeletePlease add this point as the last one from me. In the Austrian framework, the natural rate of interest IS the price spread in every line of production, a spread that would be equal across all lines of production due to arbitrage. In the money using economy, this woud manifest itself as the money rate of interest which is the price spread in terms of money in each line of production. This price spread is what would be equal across all lines of production in the ERE and this prive spread in terms of money is what is the money rate of interest.
ReplyDeleteThe money rate of interest is NOT the rate of interest charged on loans made in money. To say this, one would have to limit the determination of the rate of interest to the loanable funds market which in turn would limit us to net savings and not gross savings (demand for and supply of which is the real determinant of the rate of interest, natural or money).
This further means that looking at the intertemporal equilibrium in different commodities is NOT the correct way of understanding the interest rate in that commodity. (Looking at price spreads is the correct way and the way which is consistent with the Austrian concept of the rate of interest.) That, however is what Murphy has done on pages 4 and 5 of his thesis.
This is, as I understand it, Murphy's error. Correcting this would demonstrate why Sraffa's criticism of Hayek was way off base.
@Bala,
ReplyDeleteWhat exactly do you mean by "price spreads" and "lines of production?" I am not familiar with Austrian terms and the intuitive definition of either doesn't make sense in context.
The framework of ABCT does not require that a single natural rate of interest exist in the economic system. ABCT doesn't blow up just because the Federal Reserve System's massive credit expansion which blew up the housing bubble resulted in Joe getting an artificially low 2.45% rate, while Jim got an artificially low 2.50% rate, whereas in a free market where loans were backed by real savings they would have gotten 5.54% and 5.59% respectively instead.
ReplyDeleteMises just utilized the Wicksellian notion of single natural interest rate as a matter of simplicity. This simplifying assumption can be relaxed and ABCT will still be fully and completely applicable to the distorting effects that monetary policy has on the economic system.
The reason why no Austrian has updated ABCT to take into account multiple natural interest rates is because it just isn't a critical aspect that would make or break ABCT.
If it suits you, you can conceive of the natural rate of interest as being the totality of all individual rates of time preferences, combined through averaging out the investment/consumption ratios for all individuals. Credit expansion distorts the pricing system and pushes "the" observed average rate downwards, below what "it" otherwise would have been without monetary policy manipulation.
ABCT is so powerful that it can even explain how an economy can go through a bust boom cycle, in addition to a boom bust cycle. Thus, if the Federal Reserve System brings about a destruction of credit, unbacked by a prior drop in real savings, then this will cause interest rates to rise above what they otherwise would have been in a free market where private property is not destroyed by those tasked with protecting it. This artificial rise in interest rates will being about a false correction (bust), thus liquidations, unemployment, etc, and after the corrections are made, provided no more destruction of credit takes place the economy will then recover (boom).
The concept of economic calculation goes far beyond your pedantic reference to the 1930s "debate."
"Mises just utilized the Wicksellian notion of single natural interest rate as a matter of simplicity."
ReplyDeleteFalse: it is founfation of his theory.
"ABCT will still be fully and completely applicable to the distorting effects that monetary policy has on the economic system."
The price distortion effects require scarce factor inputs for higher-order investment projects. Anytime the factor inputs are relatively abundant or can be imported, your "distorting effects" go out the window.
"If it suits you, you can conceive of the natural rate of interest as being the totality of all individual rates of time preferences, combined through averaging out the investment/consumption ratios for all individuals."
LOL.. So now each "individual rate of time preference" is substituted for Hayek's own rates on commodity loans.
Since a monetary rate can never equal multiple "individual rates of time preference" you back to the same problem.
Anonymous, DECEMBER 29, 2011 10:10 AM,
ReplyDeleteThese terms are a part and parcel of Production Theory of the Austrian School of Economics.
A "line of production" is the entire process of transformation of factors into consumers' goods ready for consumption. The entirety of this concept is 3-dimensional.
There can be many lines of production of a single consumers' good. There can be sets of lines of production for different consumers' goods. There can also be "stages of production" within any line of production. Ford making cars would be 1 line of production. All manufacturers making cars would constitute the set of lines churning out cars. The stages of production would constitute everything from mining of iron ore, coal, etc., , extraction of iron from the ore, turning into other steel products all the way till it becomes a car. Each step is a distinct stage of production.
Before coming to "price spread", I will need to mention that the Austrian concept of production makes time an integral part of production theory. It distinguishes goods based on how close to or how far removed from consumption they are. Goods are, for instance, classified as "present goods" and "future goods". Present goods are goods ready for consumption now while future goods are goods that will become consumers' goods only at some time in the future.
In Austrian production theory, the role of the capitalist is to advance present goods to the owners of various factors of production, receive future goods in exchange and wait for them to be transformed into present goods ready for consumption at a later date. If the capitalist didn't advance present goods, every factor owner will have to wait till the transformation is complete. The capitalist thus takes over the job of waiting which is impossible to avoid in production in exchange for which he gets to reap, as income, a difference between the amount he pays all factor owners taken together and the amount he may be able to receive from consumers buying the consumers' good he produces. This difference expressed as a percentage of the amount he pays all factor owners together is called the "price spread".
Since all calculation is in terms of money, these price spreads would denote how many units of money does a capitalist in a particular line or stage of production earn as (net) income for taking on the mantle of waiting.
Austrian production theory explains how in the Evenly Rotating Economy at equilibrium in a monetary economy as well as in a non-monetary economy, the price spreads in various lines of production would tend to be equalised by arbitrage action.
This eventual equal price spread is what any capitalist investing in any line pf production in the ERE ar equilibrium would get for advancing present goods, receiving more remotely future goods, transforming them into less remotely future goods and in the process waiting for their eventual transformation into consumers' goods that he could consume. This is what Austrian production theory understands as the reward for waiting or the reward for having a low positive time preference.
It is this reward for waiting that Austrian production theory labels as the "pure rate of interest". The "natural rate of interest" is the pure rate of interest that would evolve in a non-monetary ERE while the "money rate of interest" is what would develop in the money-using ERE.
Hope that explains the Austrian concepts clearly enough.
"LOL.. So now each "individual rate of time preference" is substituted for Hayek's own rates on commodity loans."
ReplyDeleteWhere did Hayek define natural rate of interest or the money rate of interest as the rate charged on commodity loans?
Where did Hayek define natural rate of interest ... as the rate charged on commodity loans?
ReplyDeleteIn 1932. 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, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249).
In reply, Sraffa noted:
“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, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251).
That admission is clearly noted by Lachmann:
“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.
I think Glasner carries the Lachman side of the debate very well here:
ReplyDeletehttp://uneasymoney.com/2011/09/09/sraffa-v-hayek-2/
Lord Keynes makes an appearance do, as does Bob Murphy.
Glasner's comment at September 19, 2011 at 9:36 pm really seals the deal for me.
David Glasner September 19, 2011 at 9:36 pm
ReplyDelete"If we have an intertemporal equilibrium, we can calculate, for any numeraire, the own-interest rate for any commodity in terms of that numeraire. Given the own-interest rate in terms of a numeraire, we can derive the natural rate in terms of the numeraire by subtracting the cost, if any, of holding the commodity in terms of the numeraire and adding the service yield, if any, from holding the commodity in terms of the numeraire to the own interest rate of that commodity in terms of the numeraire. T "
There is no such thing as an intertemporal equilibrium, this doesn't get you anywhere.
Glasner: "Bob, the rate of return from holding all assets net of their storage costs and their current service flows must be equal in equilibrium. If not, you’re not in equilibrium. So all you have to do is find an asset with no storage cost and no current service flow and calculate its expected rate of appreciation and you have the real natural rate of interest. That is independent of your choice of numeraire."
ReplyDeleteThis is a great point and takes the argument beyond Sraffa and Hayek.
I don’t know that an inelastic credit system is something to be wished for¸ I find it possible that economies grows faster through expansion and contraction, that even serious depressions might be worth accepting, but to me it looks like something like this is what we should be discussing. Scouring every line written by every economist ever called an Austrian for his definition of the natural rate of interest seems a bit pointless in the seeming agreement on what they all see as the problem that needs to be solved.
ReplyDeleteSeeing the natural interest rate as the market price on saved means you could have as many interest rates as you could care to make, the thing is that it would tend in aggregate, over time, to represent the amount of deferred consumption. With all sorts of money there could be sudden injection of buried money-treasure re-found, functioning very much as the unwanted credit expansion, and perhaps resulting in very local lowering of the interest rate; and the loan sharks would most likely still be part of the market, so any perfect uniformity, whatever the type of money, is unlikely.
But just what such a natural rate would at any time be nobody needs to bother about, as the very definition of naturalness is the lack of care for what it should express itself as: when there is a concern for what it should measurably be, it disappears. There’s no use for a dictator in the expression of will unhampered by dictators.
One cannot but suspect that the Keynesians all see the Austrian demand on ending the Fed as a claim that the Austrians could produce more correct rates on behalf of the central bank, instead of as what the Austrians claim, that nobody should dictate them…