(1) At the end of his post, Catalán asserts:“This does not mean that rate of interest is unimportant; just that Austrian capital theory does not hinge on the concept of a “natural rate of interest.”Well, Austrian capital theory might not, but what about the Austrian business cycle theory (ABCT)? For Roger Garrison, the leading modern exponent of ABCT, uses the concept called a “market-clearing or equilibrium rate,” and he appears to mean by it the natural rate of Hayek:“The supply and demand for loanable funds … identify a market-clearing, or equilibrium, rate of interest ..., at which saving (S) and investment (I) are brought into equality.” (Garrison 2000: 39).On that same page in Time and Money: The Macroeconomics of Capital Structure (2000), Garrison makes it clear that this rate is essentially the Wicksellian rate causing intertemporal equilibrium or dis-equilibrium.
One can also read Garrison’s “Natural and Neutral Rates of Interest in Theory and Policy Formulation”:“So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. .... the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy’s productive capacity in ways that are consistent with people’s willingness to postpone consumption. In the hands of the Austrian economists, the natural rate became the rate that reflects the time preferences of market participants and allocates resources among the temporally defined stages of production. The output of one stage serves as input to the next in this logical and broadly descriptive representation of the economy’s production process. The temporal dimension of the economy’s capital structure is a key macroeconomic variable in Austrian theory. .... In summary terms, the natural rate is seen as an equilibrating rate. It is the rate that tells the truth about the availability of resources for meeting present and future consumer demands, allowing production plans to be kept in line with the preferred pattern of consumption. By implication, an unnatural, or artificial, rate of interest is a rate that reflects some extra-market influence and that creates a disconnection between intertemporal consumption preferences and intertemporal production plans” (Garrison 2006: 58–59).What are we to make of an Austrian theory whose leading theorist still embraces a non-existent, Wicksellian natural rate?
(2) Catalán asserts:“... the crucial aspect of Austrian capital theory is not the derivation of the rate of interest but, in Sraffian terms, the inducement of severe intertemporal resource misallocation. The underlining requirement for Austrian business cycle — and this is clear even in Hayek’s Prices and Production — is an increase in the stock of money representing savings and the distribution of this money to entrepreneurs. This is why, in Human Action, Mises gives more weight to fiduciary expansion than the rate of interest.”But what happens when the economy is in a state of idle capital goods, mass unemployment and idle resources? But then the following logically follows:“In the British situation of 1932, Hayek and his friends rejected the proposals of Keynes and some non-Keynesian British economists – that at the bottom of the depression the government should take certain steps, and so on. Hayek has now realised that that was wrong. That is to say, I think Austrians today would not reject all measures to relieve unemployment and increase employment, in a situation in which nothing really is scarce. And in this respect I think Austrians … would have … have ... learned.”Click on the link to see what horrible enemy of freedom said this, or go here or here and read more (hint: it wasn’t Paul Krugman!).
When Catalán states that “Mises gives more weight to fiduciary expansion than the rate of interest,” then presumably fiduciary expansion is also a more important cause of an Austrian business cycle (ABC) than the interest rate. Clearly, this requires that fiduciary expansion is a sufficient cause for an ABC.
Does this not contradict Catalán’s earlier post? We are supposed to believe that a free banking system would avoid over-expansion of credit, but, as I have shown here, a real world case that approximates the free bankers’ utopia – Australia in the 19th century – does not support their idea at all.
Garrison, R. W. 2000. Time and Money: The Macroeconomics of Capital Structure, Routledge, London and New York.
Garrison, R. W. 2006. “Natural and Neutral Rates of Interest in Theory and Policy Formulation,” Quarterly Journal of Austrian Economics 9.4: 57–68.