Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014Salerno’s post is unintentionally hilarious, given the quotation that opens his post (comparing the righteous and poor persecuted Austrians with Gandhi!):
http://bastiat.mises.org/2014/01/paul-krugman-attacks-ludwig-von-mises-another-win-for-austrian-economics/
“First they ignore you, then they laugh at you, then they fight you, then you win.”Funny you use that quote, Salerno, because it would appear to be a perfect description of how you (and other Austrians) treatment me and my blog.
(Mahatma Gandhi).
First of all, arguments stand and fall on their own merits, not on the obscurity or identity of the author. But it appears Salerno doesn’t agree with that and resorts to exactly the tactics described above.
Salerno says the following of my post here:
“Actually, our jaded scribe [sc., Krugman] could not be bothered to train his sites on Mises’s actual views but rather rests content to attack a caricature of Mises’s position as presented in a pseudonymous post by an individual calling himself ‘Lord Keynes’ on the blog Social Democracy for the 21st Century: A Post Keynesian Perspective. Blithely accepting ‘Lord Keynes’s’ claims at face value, Krugman declares ‘von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.’”No, Salerno, I did not say that “von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.”
Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014
http://bastiat.mises.org/2014/01/paul-krugman-attacks-ludwig-von-mises-another-win-for-austrian-economics/
Here is what I said (with my quotation from Mises following):
“However, it is interesting that Mises thought that his Austrian monetary theory of the cycle could not adequately explain the severity and length of the Great Depression (as also noted by Hülsmann 2007: 617–618):So it appears that Salerno either (1) did not read the post or (2) did not read it properly or ignored what I actually said. Since Salerno later repeats one of my quotations from Mises, it would appear to be (2).“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings. The most recent boom period did not run its course completely, at least not in Europe. Some countries and some branches of production were not generally or very seriously affected by the upswing which, in many lands, was quite turbulent. A bit of the previous depression continued, even into the upswing. On that account—in line with our theory and on the basis of past experience—one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.
The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.” (Mises 2006 [1931]: 163–164).
But if Salerno did not read the post properly or “ignored” what I said, then Salerno appears to have fulfilled the first of these failings of his quotation (“First they ignore you, then they laugh at you, then they fight you, then you win”).
It also follows that Salerno’s charge that my post was “a caricature of Mises’s position” is a straw man, though perhaps unintentionally.
This is reinforced when Salerno borrows a quotation of mine from Mises and uses it to prove that “Mises did not deny that the Great Depression was initiated by credit expansion.” That is correct, but then I did not assert that Mises abandoned his business cycle theory.
Salerno’s following charge that Krugman is unable “to grasp a multi-causal explanation of a complex and multifaceted historical episode” that was the Great Depression is so stupid, it’s laughable, and is actually more appropriate for the grossly oversimplistic explanation of Mises himself, who ignored the complex factors in the 1930s that thwarted any strong inducement to hire labour and clear the labour market via lower wages, such as the level of demand for output, the degree of uncertainty of capitalists about the future, business expectations, the general state of expectations, and the state of the financial system and credit markets, and so on.
After this Salerno links to a paper by Ohanian (2009) arguing that Hoover’s “high wage” policy was a major cause of the US depression, which is rather strange because Mises was talking about the Great Depression in Europe, not the United States.
Be that as it may, it is clear that, firstly, Hoover’s “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with. But secondly and more importantly, Jonathan D. Rose (2010) presents some evidence that Hoover’s “high wage” policy actually did not have much effect on the timing of US wage cuts during the depression.
Thirdly, even when wages fell, this induced severe debt deflationary effects, because price deflation was quite uneven, and the burden of fixed nominal debt soared. So the smooth and rapid market clearing as postulated by Mises as the cure for high involuntary unemployment simply could not and did not happen.
Next, Salerno admonishes Krugman to “stop trawling obscure blogs for biased material” on Austrians – referring to my blog.
This seems like a rather good example of the second part of Salerno’s opening quote (“First they ignore you, then they laugh at you, then they fight you, then you win.”).
Even the charge that my blog is “obscure” (though irrelevant) is, I think, wrong. I’ve made it into the Onalytica Influence Index’s “Top 200 Influential Economics Blogs” (August 2013). Even though I am at no. 178 (at the moment), there are thousands of economics blogs all over the internet, so I’m not quite so “obscure” as Salerno thinks.
And, in point of fact, Robert Murphy seems to have already moved onto the third stage (“fighting” me): he promised here to respond in greater detail to me later this week. I look forward to that.
Finally, Salerno’s links to his paper “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” in his attempts to provide Krugman with “an honest and accurate account of the Austrian theory.”
That is priceless, because a “reformulation” implies that there was something inadequate about the original theory, which does not say much for the ABCT if it needs to be regularly reformulated.
I would go so far as to say that the Austrian business cycle theory is a sad history of “reformulations” as Austrians encountered severe and cutting criticisms of their theory.
For example, Hayek’s first version of the ABCT in Prices and Production (London, 1931) encountered devastating criticisms from Sraffa (1932a, 1932b) and others and he was forced to “reformulate” the theory in Profits, Interest and Investment (London, 1939).
If we turn to Salerno’s new ABCT, one of the main purposes of his paper is to address the criticism that the ABCT “cannot explain the positive correlation of consumption and investment that occurs over the course of the business cycle” (Salerno 2012: 5). But such a charge against the ABCT is only one of the minor problems with the theory.
The main problem with the classic ABCT was always its use of the Wicksellian natural rate of interest: an irrelevant and non-existent concept, as Sraffa showed a long time ago (Sraffa 1932a and 1932b). Outside of an equilibrium state, there could be as many natural rates of interest as there are factor inputs. So what natural rate should banks target when setting interest rates?
I will leave a more detailed critique of Salerno’s paper for another post, but for the moment it is sufficient to note that Salerno (2012: 6, 37–38) invokes and indeed needs the non-existent natural rate of interest for his “new” ABCT to work, just like most of the other versions of the theory.
On this point alone, Salerno’s “reformulation” of the ABCT is as worthless as any other of the pathetic “reformulations” over the years.
Further Reading
“Hoover’s High Wage Policy and the Great Depression,” July 30, 2013.
“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.
BIBLIOGRAPHY
Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
Ohanian, Lee E. 2009. “What – or Who – Started the Great Depression?,” NBER Working Paper Series, 15258
http://www.nber.org/papers/w15258
Salerno, Joseph. 2012. “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” Quarterly Journal of Austrian Economics 15.1: 3–44.
http://mises.org/journals/qjae/pdf/qjae15_1_1.pdf
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.
Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843–870.
"If we turn to Salerno’s new ABCT, one of the main purposes of his paper is to address the criticism that the ABCT “cannot explain the positive correlation of consumption and investment that occurs over the course of the business cycle” (Salerno 2012: 5)."
ReplyDeleteI recall showing with direct quotations that this was nonsense.
http://fixingtheeconomists.wordpress.com/2013/12/06/tyler-cowen-and-daniel-kuehn-miss-the-point-of-the-austrian-business-cycle-theory/
There's also a quote at the end from Hayek on the stickiness of prices and multiplier effects.
The Austrians don't bother reading the original authors and the ABCT is vague and largely without definition. It is a sort of handwave to "something to do with interest rates, credit and malinvestment". From what I can tell the original intention of the authors was to stress the malinvestment angle but these days every Austrian cultist has their own interpretation and they all sound like something from a guy with a tin-foil hat at a Ron Paul rally.
"The main problem with the classic ABCT was always its use of the Wicksellian natural rate of interest: an irrelevant and non-existent concept, as Sraffa showed a long time ago (Sraffa 1932a and 1932b). Outside of an equilibrium state, there could be as many natural rates of interest as there are factor inputs. So what natural rate should banks target when setting interest rates?"
ReplyDeleteThis passage makes no sense to me as a useful argument against ABCT.
The "natural rate of interest" is not a real rate at all and no equilibrium state is required. It is a concept that is used to set up a contrast between what an interest rate would have been absent third party interferrence. There is no single rate that is appropriate for all transactions. Each and every one is unique and the interest rate applied to each would be the agreed upon by the two partys. When any interest rate is set, either privately or by central command, it may be too high, too low, or just about right. HIndsight will sort it out. When it is set by the all powerful Oz the leveling effect of many independent evaluations is discarded. Then there is movment away from stability and sustainability.
"The main problem with the classic ABCT was always its use of the Wicksellian natural rate of interest: an irrelevant and non-existent concept"
ReplyDeleteThe Wicksellian natural rate of interest is the interest rate that equates saving and investment.
The natural rate of interest also plays an important role in Keynesian economics. The Keynesian goods market cannot be in equilibrium unless saving and investment are equal:
"For the goods market to be in equilibrium, then, the aggregate supply of goods must equal the aggregate demand for goods, or equivalently, desired national saving must equal desired investment" (Abel and Bernanke, 2005 p. 140).
If investment is greater than saving, then there is an excess demand for goods in the Keynesian framework. In the Keynesian Cross diagram, an excess demand for goods (I>S) means aggregate expenditure is greater than income. In the IS-LM framework, the economy will be located to the left of the IS curve if investment is greater than saving.
The natural rate of interest is just the interest rate that brings saving and investment into balance. One cannot refute the ABCT on the grounds of the natural rate of interest without simultaneously refuting the entire Keynesian framework.
Non-Austrians should read "Time and Money" by Roger Garrison to understand the ABCT.
Well, neoclassical Keynesians no doubt retain some version of the natural rate.
DeletePost Keynesians -- who are not neoclassicals -- do not.
And in point of fact Keynes's GT is based on rejection of Wicksell's natural rate:
http://nakedkeynesianism.blogspot.com/2011/06/dr-krugman-and-natural-rate-of-interest.html
So it does not remotely concern me that neoclassical Keynesianism has theoretical problems if deprived of the natural rate, because I do not support neoclassical Keynesianism.
And of course Sraffa's critique of Hayek's ABCT absolutely remains a devastating demolition of that theory.
Keynes only argued that the natural rate did not have "anything very useful or significant to contribute to our analysis". I cannot find any quote from Keynes that constitutes a complete rejection. Perhaps you can help me find a quote.
ReplyDeleteI'm surprised that a Post-Keynesian would claim that "Keynes's theory GT based on a rejection of Wicksell's natural rate."
Keynes only has one diagram in the General Theory (p. 180). The purpose of that diagram is to show that the supply of loanable funds follows the demand for loanable funds: an increase in investment increases income which increases saving. According to Keynes, the supply and demand for loanable funds always shift together.
Keynes's only objective was to show that the supply and demand for loanable funds did not determine the interest rate. Keynes claims the supply and demand for loanable funds "tell us nothing about the rate of interest. They only tell us what income will be" (GT, p. 181).
According to a Post-Keynesian, isn't the interest rate only of secondary importance? Isn't the secular insufficiency of investment more important?
“It is not quite correct that I attach primary importance to the rate of interest. What I attach primary importance to is the scale of investment and I am interested in the lowest interest rate as one of the elements furthering this. But I should regard state intervention to encourage investment as probably a more important factor than low rates of interest taken in isolation” (Keynes)
I am not sure whether we are talking at cross purposes because of ambiguity in what each of us means by the "natural rate"?
DeleteWhat I mean is Wicksell's (real) natural rate of interest: a non-monetary theory of the interest rate that is independent of money and credit (Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory, p. 27).
Wicksell's “natural rate of interest” would be the rates on barter loans of a physical non-labour factor input commodities (Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53 at pp. 49–51).
In a world of heterogeneous capital goods which is out of general equilibrium, there could (as Sraffa argues) be as many natural rates on each commodity considered as a capital good as there are such commodities (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, at p. 288).
This is the concept that Sraffa pointed out can't be a single quantity in a disequilibrium and so banks cant equate the money rate of interest with it.
That is, the Austrian business cycle theory is seriously theoretically flawed since it is based on Wicksell's unique natural rate.
Are we talking about the same concept?
And, yes, in this quote Keynes (seems) to be talking about a monetary equilibrium "natural rate" that equates saving with investment, a different concept:
Delete""In my Treatise on Money I defined what purported to be a unique rate of interest, which I called the natural rate of interest — namely, the rate of interest which, in the terminology of my Treatise, preserved equality between the rate of saving (as there defined) and the rate of investment. I believed this to be a development and clarification of Wicksell’s “natural rate of interest”, which was, according to him, the rate which would preserve the stability if some, not quite clearly specified, price-level. ... I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment.
I am now no longer of the opinion that the concept of a “natural” rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis.""
You make an important distinction between:
ReplyDelete1. Non-Monetary Natural Rate
2. Monetary Natural Rate
The ABCT is not necessarily based on the Non-Monetary Natural rate as you suggest.
Today, Roger Garrison is the leading Austrian business cycle theorist. He presents the ABCT in terms of what you called the Monetary Natural Rate. He articulates (and diagrams) the ABCT using the loanable funds theory in which the the interest rate equates saving and investment.
Have you read Garrison's book "Time and Money"? It's highly recommended by Michael Emmet Brady. If not, you should read the following paper before you critique Salerno's paper to minimize confusion.
http://www.auburn.edu/~garriro/cbm.pdf
"The ABCT is not necessarily based on the Non-Monetary Natural rate as you suggest. "
DeleteAnonymous,
Virtually all versions of the ABCT are based on Wicksell's natural rate. Even Mises's originary rate reduces in the context of his ABCT in Human Action to a version of Wicksell's natural rate.
Even Garrison's ABCT is based on a Wicksellian natural rate:
"“So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, 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, R. W. 2000. Time and Money: The Macroeconomics of Capital Structure, 58–59).
Right on pp. 39-40 of Time and Money: The Macroeconomics of Capital Structure, Garrison makes it clear his theory uses both (1) a market clearing monetary rate in the loanable funds market and (2) Wicksell's real natural rate. (1) is supposed to equal (2) to avoid malinvestment and inter-temporal coordination failures.
But as noted by Sraffa (2) is not a single value in disequilibrium: there could be as many natural rates as there are commodities used as non-labour factor inputs..
So I am afraid, Anonymous, that you do not know what you are talking about.
That quote does not come from "Time and Money" ... Pages 58-59 are about Technology Induced Growth.
DeleteNeither "Wicksell" nor "natural rate" appear on pages 39 or 40.
Are you using kindle?
(1) Regarding quote (1) above. My mistake. It actually comes from:
DeleteGarrison, R. W. 2006. “Natural and Neutral Rates of Interest in Theory and Policy Formulation,” Quarterly Journal of Austrian Economics 9.4: 57–68.
But even so it still supports my case.
(2) Nevertheless, pp. 39-40 of Time and Money: The Macroeconomics of Capital Structure, Garrison makes it clear his theory uses Wicksell's real natural rate.
You need only read those pages to see that is true.
Correction: 38-39 of Time and Money: The Macroeconomics of Capital Structure.
DeleteHayek acknowledges the ambiguity of the term Natural Rate:
ReplyDelete“Unfortunately Wicksell’s change in terminology is also linked up with a certain ambiguity in his definition of the natural rate. Having correctly defined it once as 'that rate at which the demand for loan capital just equals the supply of savings,' he redefines it, on another occasion, as that rate which would rule 'if there were no money transactions and real capital were lent in natura.' ... If this last definition were correct, Dr. G. Halm would be right in raising, against the conception of the "natural rate," the objection that a uniform rate of interest could develop only in a money economy, so that the whole analysis is irrelevant." (Prices & Production and Other Works, p. 113).
On page 58 and 78, Hayek affirms his definition of the natural rate as the rate of interest that equates saving and investment. In the footnote on page 73, Hayek says the term 'equilibrium interest rate' is preferable to the term 'natural interest rate'.
You should not argue with Sraffa that the natural rate "would be rates on barter loans of a physical non-labour factor input commodities". Your forthcoming critique of Salerno's paper will be more successful if you assume that advocates of ABCT define the natural rate as the interest rate that balances saving and investment.
For references see:
http://mises.org/books/hayekcollection.pdf
(1) Hayek’s Prices and Production (2nd edn.; 1935) does use Wicksell's natural rate:
Delete“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.
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).
(2) Your Hayek quote:
"Unfortunately Wicksell’s change in terminology is also linked up with a certain ambiguity in his definition of the natural rate. Having correctly defined it once as 'that rate at which the demand for"...
First, that passage comes from Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome] in Hayek 2008: 1–130), and secondly, in that passage Hayek is clearing defending the use of Wicksell's natural rate in his ABCT!
So once again we see you do not know what you are talking about.
I am not a Hayek fan. I'm trying to help you prepare your critique of Salerno's paper. Here is some friendly advice:
ReplyDeleteYou will not successfully convince ABCT advocates following Sraffa. According to modern advocates of ABCT, the natural rate of interest is the interest rate that balances saving and investment. I've already provided quotes from "Prices & Productions AND OTHER WORKS" Here's more:
"Wicksell's idea of a natural, or equilibrium, rate of interest [is] the rate at which the amount of new investment corresponds to the amount of current savings" (Hayek p. 22, Reflections on the Pure Theory of Money of Mr. J. M. Keynes continued).
"The natural rate of interest is the rate that equates
saving and investment." (Garrison p. 114, http://mises.org/Books/austtrad.pdf)
Even if "I didn't know what I was talking about", you attach too much importance to Wicksell's theory in the ABCT:
"Hayek establishes that his monetary theory of economic fluctuations is consistent with any of the 'modern interest theories' and need not be based on any particular one" (Huerta de Soto, p. 286)
Focus on Mises. Focusing your refutation of ABCT on Wicksell and Hayek is analogous to an Austrian focusing their refutation of Keynes on Hicks and Hansen.
You attach the word pathetic to the ABCT. Any pathetic theory is vulnerable on many different fronts. Economic calculation is essential to ABCT. You must address economic calculation.
Wage your attack against ABCT on all aspects of the theory, not just interest.
"According to modern advocates of ABCT, the natural rate of interest is the interest rate that balances saving and investment. "
DeleteThat is because you fail to distinguish between 2 different interest rates:
(1) the (real) Wicksellian natural rate, and
(2) the monetary market clearing interest rate that clears the loanable funds market (sometimes call the "equilibrium rate" or even "natural" rate) .
------
Yes, Austrians use both in their ABCT. I don't deny that they use (2).
But they ALSO use (1).
(2) must equal (1) for there to be reliable intertemporal coordination, and for ABCT to be viable theory.
But as noted by Sraffa rate (1) is not a single value in disequilibrium: there could be as many natural rates as there are commodities used as non-labour factor inputs.
How can a limited spread of monetary bank rates or one bank rate equal potentially thousands of natural rates on non-labour factor inputs?
And in point of fact, even interest rate (2) above is a myth because monetary interest rates aren't explained by pure time preference, but by liquidity preference.
(1) So you are conceding that Hayek's ABCT is based on Wicksellian natural rate?
ReplyDelete(2) But even Mises's original ABCT uses Wicksell's natural rate, as can be seen in Monetary Stabilization and Cyclical Policy (1928), “The Causes of the Economic Crisis” (1931), and the 1953 edition of The Theory of Money and Credit :
“Wicksell distinguishes between the natural rate of interest (natürliche Kapitalzins), or the rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, and the money rate of interest (Geldzins), or the rate of interest that is demanded and paid for loans in money or money substitutes. The money rate of interest and the natural rate of interest need not necessarily coincide, since it is possible for the banks to extend the amount of their issues of fiduciary media as they wish and thus to exert a pressure on the money rate of interest that might bring it down to the minimum set by their costs. Nevertheless, it is certain that the money rate of interest must sooner or later come to the level of the natural rate of interest, and the problem is to say in what way this ultimate coincidence is brought about.
Up to this point Wicksell commands assent;” (Mises 2009 [1953]: 355).
“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 2006 [1978]: 107–108).
“The ‘natural interest rate’ is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing ‘natural interest rate’” (Mises 2006 [1978]: 109; from Monetary Stabilization and Cyclical Policy [1928]).
“According to the circulation credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy—expansion of bank credit by the issue or creation of additional fiduciary media (that is banknotes and/or checking deposits not covered 100 percent by gold). On a market, which is not disturbed by the interference of such an “inflationist” banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as “natural” or “static” interest rates.”
Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 161.
-------------
Do you agree?
(3) "You will not successfully convince ABCT advocates following Sraffa. According to modern advocates of ABCT, the natural rate of interest is the interest rate that balances saving and investment."
If you mean by that a monetary interest rate that clears the market fro loanable funds, then yes they do, but they ALSO use Wicksell's natural rate, since that monetary bank rate must equal Wicksell's natural rate to create intertemporal coordination.
Were you able to read this chapter about Keynes vs. Hayek by Roger Garrison?
ReplyDeletehttp://www.auburn.edu/~garriro/cbm.pdf
Your critique of Salerno and ABCT should assume the monetary interest rate that clears the loan market.
ReplyDeleteThe ABCT is ultimately about banks falsifying eeconomic calculation. According to Mises, economic calculation is only possible in a money economy:
"Economic calculation is calculation in terms of money prices" (Human Action, p. 206)
"The common denominator of economic calculation is money" (Human Action, p. 215).
Mises uses the terms 'economic calculation' and 'monetary calculation' interchangeably. Mises argues that economic calculation is impossible in a totally socialist society because there are no money prices.
Sraffa's critique of ABCT only addresses the non-monetary natural rate. Sraffa's critique will not convince ABCT advocates that ABCT is incorrect because monetary economic calculation is impossible in a non-monetary economy.
Focus your critique on the monetary interest rate that clears the loan market. I look forward to reading it.
(1) " Sraffa's critique will not convince ABCT advocates that ABCT is incorrect because monetary economic calculation is impossible in a non-monetary economy."
DeleteSuch Austrians are simply ignorant of what ABCT even says. Its early Misesian and Hayekian form are dependent on Wicksell's (real) natural rate of interest.
(2) Post Keynesian critiques of loanable funds theory and market clearing interest rates allegedly coordinating saving and investment go back to Keynes and are easy to find:
http://socialdemocracy21stcentury.blogspot.com/2013/06/greg-hill-on-moral-economy-keyness.html