Sunday, August 4, 2013

Reply to Juan Ramón Rallo, Part 2

Juan Ramón Rallo replies to me here:
Juan Ramón Rallo, “Réplica a Lord Keynes sobre la teoría austriaca del ciclo económico,” 4 August, 2013.
Some responses:
(1) On the non-existence of the unique Wicksellian natural rate of interest, Rallo appears to concede that, once Sraffa’s critique of Hayek (1932a, 1932b) on this issue is accepted, the classic versions of the ABCT are clearly unacceptable. Well, I am not sure how this isn’t a victory for me.

Now Rallo says this does not matter because the ABCT is still being developed, and it is a type of “work-in-progress.” If one wants to believe that, then Austrians should be very humble indeed in their claims about what the theory can explain, because they do not even have a well formulated theory.

The rest of Rallo’s points from (1.2) to (1.7) simply assume the truth of time preference and loanable funds. Yes, if he thinks that these theories are true, he might be able to defend a version of ABCT. I have already made it clear that there are strong reasons for rejecting the truth of time preference interest rate theory and loanable funds.

Rallo says that
“every saver has a projected path of future consumption that, in the aggregate, must match the path of future production planned by producers/investors.”

“Cada ahorrador tiene una senda prevista de consumo futuro que, en agregado, debe coincidir con la senda de producción futura planeada por los productores/inversores.”
No, that is simply untrue.

As Keynes said,
“An act of individual savings means – so to speak – a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption.” (Keynes 1936: 210).
If a person saves $100 today, there is no necessary reason why $100 will be spent on goods or services at any time in the future.

Or, to say it in Spanish: Si una persona ahorra $ 100 hoy en día, no hay ninguna razón necesaria por 100 dólares se gastarán en cualquier momento en el future (though no doubt this is terrible Spanish, as I have used a machine to translate it).

There is no necessary reason why an act of saving of money today must entail a future act of consumption (Hill 1996: 40). Just because interest rates fell when $10,000 was saved and put in banks, it does not follow that this indicates that the savers now want to buy $10,000 worth of goods at some time in the future. Money invested can simply be invested again in the future. Or money spending can be on (1) newly produced goods and services, (2) second hand goods and services or (2) assets on secondary markets. There is no reason why it must always be on newly produced goods and services.

In short,
(1) a decision to save money now does not entail a future consumption purchase;

(2) saved money now need not be invested in capital goods projects, and may be used to buy secondary assets (either real or financial). A large stock of money is at any one time tied up in purchases and sales of secondary assets;

(3) money made available for capital goods investments may have simply been shifted from purchasing of secondary assets (either real or financial) and not from abstention from consumption, and there need be no change in time preference, only liquidity preference.

(4) changes in monetary interest rates, even in hypothetical free market economies, need signal no reliable information and indeed no information at all about time preference or real resource availability.
With his emphasis on “maturity mismatch,” Rallo seems to be thinking in the crudest Rothbardian terms in which fractional reserve banking is illegitimate and all loans must be “term deposits” or “time deposits” (or a “depósito a plazo fijo,” which I think is what the Spanish call this). In reality fractional reserve banking is not fraud or illegitimate, demand deposits and loans callable on demand are perfectly legitimate.

Or perhaps Rallo is a student of Jesús Huerta de Soto (a Spanish Austrian economist at the Universidad Rey Juan Carlos), who makes the same errors.

I have already demonstrated the severe flaws in Jesús Huerta de Soto’s view of banking here:
“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.

“Callable Option Loans and Fractional Reserve Accounts,” December 16, 2011.

“Future Goods and Fractional Reserve Banking,” December 15, 2011.

“Lawrence H. White refutes Huerta de Soto on Fractional Reserve Banking,” February 22, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Huerta de Soto on the Mutuum Contract: A Critique,” August 11, 2012.

“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012.

“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique,” August 31, 2012.

“Huerta de Soto on Justinian’s Digest,” September 1, 2012.

“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.
(2) The discussion of idle resources merely continues to assume the truth of the flawed theories ABCT requires to work: the coordinating role of interest rates that communicate information about time preference and that investment in real world economies can become so intense that severe physical shortages of capital occur to cause widespread collapse of investment projects.

The reality is that, even in strong booms, businesses still carry stocks or inventories of goods, resources are not fully used, international trade makes goods available from overseas and even workers can be hired from overseas.

(3) Again, most of the criticisms against me reduce to saying I think capital is homogenous putty, but I have said no such thing.

(4) I have already dealt with the reasons why time preference theory of interest rates and loanable funds are unacceptable in (1) above.

(5) This seems to be an admission that Lachmann did not think that the ABCT was a universal theory, but nevertheless ABCT is valid because it explains intertemporal discoordination. See (1) above.

(6) The whole idea of “artificial credit expansion” begs so many questions: it assumes the truth of Rothbard’s anti-fractional reserve banking ideology and the truth of strict loanable funds.

It also bespeaks an inability to see that money is endogenous in modern credit and banking systems.


Hill, Greg. 1996. “The Moral Economy: Keynes’s Critique of Capitalist Justice,” Critical Review 10: 411–434.

Keynes, J. M. 1964 [1936]. The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.

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.


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