Wednesday, August 26, 2015

Robert Murphy defends the ABCT – even though he doesn’t accept the Wicksellian Natural Rate of Interest

When Austrians (metaphorically) shoot themselves in the foot, the results are usually amusing.

We are treated to just such a delightful spectacle here:
Robert P. Murphy, “Mises and the Market,” Dailycaller.com, 26th August, 2015.
http://dailycaller.com/2015/08/26/mises-and-the-market/
This is Robert Murphy’s defence of the Austrian business cycle theory (ABCT) as an explanation of recent global turmoil on stock markets and other economic problems.

The astute reader will notice that in the course of the article Murphy casually mentions the Wicksellian natural rate of interest as the foundation of the ABCT.

But wait a minute … Isn’t Robert Murphy the author of this paper called “Multiple Interest Rates and Austrian Business Cycle Theory”?

In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?:
“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.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).
And now the crucial quotation from Murphy:
“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to ‘the’ natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below ‘the’ natural rate, because there is no such thing.”
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).
So in print before our eyes Murphy has rejected the Wicksellian natural rate of interest – a “natural” and market rate of interest that would equilibrate savings and investment. We can add to this the rather embarrassing point that Murphy also agrees with Keynes that interest rates are a monetary phenomenon and a great part of Murphy’s PhD is devoted to defending a monetary theory of interest (as opposed to the Wicksellian theory).

But his recent defence of the ABCT just assumes that such a single Wicksellian natural rate of interest exists and doesn’t even mention his own rejection of the concept.

Is Murphy capable of explaining to us why the classical Austrian business cycle theory doesn’t collapse to its foundations if the natural rate is untenable as argued in his paper “Multiple Interest Rates and Austrian Business Cycle Theory”? Isn’t this massive hypocrisy on his part?

There are also a couple of other points I can’t resist addressing. Murphy in his article states the following:
“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.

Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.”

Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/
This is of course a claim from the classical ABCT: that artificially low interest rates drive excessive investment and create massive malinvestment leading to real capital scarcity and shortages and in some cases actually lack of resources to finish projects.

Anyone can see that this is a bizarrely – if not insanely – inaccurate description of capitalist economies since 2008, where there was massive idle resources, huge unemployment and significant unused industrial capacity.

It is also especially laughable because right after the quotation above, Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged malinvestment by industrial firms or in real capital projects.

All in all, the Austrian story on modern capitalism is refuted by the empirical evidence and in Murphy’s case refuted by his own previously expressed ideas on the non-existence of the natural rate of interest.

Further Reading
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Daniel Kuehn on the Austrian Business Cycle Theory,” December 5, 2013.

“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.

“How did Wicksell, the early Austrians and Keynes define the Natural Rate of Interest?,” October 4, 2014.

“Another Example of Wicksell’s Second Definition of the Natural Rate of Interest,” October 8, 2014.

“My Posts on the Natural Rate of Interest,” November 19, 2014.

BIBLIOGRAPHY
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
http://consultingbyrpm.com/uploads/Dissertation.pdf

Murphy, Robert P. 2011. “Is Keynes from Heaven or Hell,” 7 July.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html

Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

98 comments:

  1. I hope Bob responds to your post.

    But what is the meaning of "Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged mal-investment by industrial firms or in real capital projects.."

    If ABCT is correct wouldn't you get both asset price inflation AND real (if mal)-investments. Its not like QE money disappears for circulation once it is used to buy existing stock. It could at various points both finance real investment and be used to buy existing stock

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    1. Quite.

      The central bank policies have had enormous effects on prices, just not those anticipated by policy makers. To see an absence of price inflation or real investment does not mean Austrian theory has been invalidated, you need to follow the money. They printed the money and it went somewhere, be it mortgage backed securities or to maintain loans to businesses that would otherwise have failed if interest rates had been allowed to find their market level. This is why Mises bangs on about a priori reasoning, one cant use empirical evidence to somehow invalidate pretty logical reasoning... central bank issues money to buy mbs... the mbs price will be higher than it otherwise would have been... no matter what the actual price of the mbs is, higher or lower, doesnt prove or disprove this logic.

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    2. "Its not like QE money disappears for circulation once it is used to buy existing stock. It could at various points both finance real investment and be used to buy existing stock"

      It makes no difference whether you own a million dollars worth of government bonds or a million dollars in bank deposits or cash. Either way, you can afford to invest. Selling bonds to the central bank in exchange for bank deposits does not increase the private sector's ability to invest.

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    3. Sandymount,

      All you're saying is that if the central bank creates money, this will have an effect on the economy. That may or may not be true, but either way, that in itself is not the ABCT.

      You are simply assuming in a circular way that any effect the central bank has must necessarily be bad, without bothering to show how or why.

      Simply saying that 'prices are different to what they would otherwise have been' is not enough. A change in prices in itself is not necessarily bad.

      You can't just assume that any effect the central bank has on the economy must be bad by definition. That's not a theory, it's just an unfounded assertion.

      Delete
    4. Rob Rawlings@August 27, 2015 at 7:08 AM

      (1) I meant what I said: "QE wasn’t being used to finance massive real investment driving alleged mal-investment by industrial firms or in real capital projects".

      This is obvious since we would have evidence of this (a strong boom and capital shortages), and the only effect Murphy can identity is a stock market bubble.

      In general, Murphy needs to provide **empirical evidence** that there is a general crisis caused by lack of real, physical factor inputs. None is provided.

      (2) "I hope Bob responds to your post."

      Don't make me laugh.

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    5. @Phillippe

      "Selling bonds to the central bank in exchange for bank deposits does not increase the private sector's ability to invest. ". Sure it does, If i sell $1m of gvt bonds to the treasury I have an extra $1m to invest (if I choose) that I i didn't have before.

      @LK You said "QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment ".

      How else can this be interpreted other than that not only WAS there not mal-investement but there COULD not have been mal-investement becasue the money had instead gone to fund assets speculation.

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    6. Read the word "massive" and comprehend its meaning, Rob Rawlings.

      I have increasingly less and less patience with bloody idiots these days.

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    7. "If i sell $1m of gvt bonds to the treasury I have an extra $1m to invest"

      What, you're $1m richer than you were before? No, you're not.

      You could have sold your bonds or used them as collateral at any point if you wanted to invest.

      Delete
  2. Regarding his comments on low interest rates/investment since 2008 I dont think it is something we can establish emprically as you would have to look compare the investmetn we have had with rates this low vs what they would have been with higher rates. It is a similar error when some critiques of Austrian theory say it has been refuted by no rise in various price indexes despite massive central bank balance sheet expansion. The point is that the prices are higher than they would have been without such balance sheet expansion. I suspect Keynesians and Austrians would agree on that whether or not they agree on the policy itself.

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    1. "The point is that the prices are higher than they would have been"

      Again, all you are saying is that the central bank actions have had an effect. That in itself is not the ABCT. In order to argue that central bank actions are bad, you have to present a theory as to why. You can't just say: central bank actions had an effect on the economy, therefore those central bank actions are necessarily bad! That's just circular.

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    2. "The point is that the prices are higher than they would have been without such balance sheet expansion"

      You can't know that for certain. A CB balance sheet expansion could simply be matched by an equal fall in 'velocity', for example. You are simply making the unfounded assumption that a balance sheet expansion must necessarily increase prices.

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    3. Maybe I wasnt clear Philippe, saying prices are higher than they would otherwise be doesnt mean they are higher in absolute terms. The price could be 10% lower but without central bank intervention they would have been 15% lower for example. So a lower price after central bank action doesnt 'empirically' disprove the logic that central bank action affects prices. I am making a narrow but very widely overlooked point.

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    4. Sandymount@August 27, 2015 at 7:36 AM

      The primary issue here is the invalidity of the natural rate of interest and how it cannot even be defined in a world of heterogeneous capital goods.

      Clearly, this is an issue you are not even engaging with.

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    5. Sandymount@August 27, 2015 at 8:34 AM

      Obsessing over how CB action might change prices is relevant as a criticism only if you think all or most prices are flexible and rapidly clear markets.

      This is utter B.S. Most prices are cost-based mark-up prices that don't change much in response to demand, and that do not perform the function if equating demand with supply. Nor do most prices perform the Hayekian "prices as information" function so dear to Austrians.

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    6. This comment has been removed by the author.

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    7. Sandymount,

      "saying prices are higher than they would otherwise be doesnt mean they are higher in absolute terms"

      I understand that. But you can't know that prices are higher than they otherwise would be. You are assuming that is the case. You are assuming that other variables, such as 'velocity', don't change.

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    8. LK. I used to work in an investment bank and can assure you that the price we sold securities to central banks, funds, banks, your mother-in-law were not 'cost plus'. I don't believe you seriously believe that.

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    9. christ, are you so stupid that you don't understand my comment was referring to newly-produced goods, not financial assets?

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    10. My apologies, hard to keep up with the switch n bait tactics with ad hominems to flavour. Please advise how newly produced goods are priced on cost not on subjective value of purchaser unlike say financial assets. This would be useful info for failed businesses to learn.

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    11. Hi Sandymount,

      "The point is that prices are higher than they would have been without such balance sheet expansion. I suspect Keynesians and Austrians would agree on whether or not they agree on the policy itself."

      Quantitative easing is meant to stimulate economic activity when interest rates fall. But. although a fall in nominal and real interest rates might stimulate real economic activity, some Keynesians would argue that an expansion of Gross Private Capital Formation depends more on the state of entrepreneurs' profit expectations, rather than on lower interest rates..

      Profit expectations depend on entrepreneurs assesing likely aggregate demand over the life of new capital projects in relation to aggregate supply. If business confidence is low, then lowering interest rates through quantitative easing might not have the desired effect on new capital goods expansion.

      How do we know that asset prices must be higher than they would have been? How is this determined without some kind of empirical analysis?

      Does a fall in nominal interest rates below the so called natural rate of interest lead to mal-investments as ABC theory they claims? When a fall in interest rates does lead to rising entrepreneurs' expectations of profitability, in the light of unemployed resources, how is it possible to say that a mis-allocation can occur?

      ABC theory seems to me to imply Say's Law which Keynes refuted.

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    12. Hi Sandymount,

      "The point is that prices are higher than they would have been without such balance sheet expansion. I suspect Keynesians and Austrians would agree on whether or not they agree on the policy itself."

      Quantitative easing is meant to stimulate economic activity when interest rates fall. But. although a fall in nominal and real interest rates might stimulate real economic activity, some Keynesians would argue that an expansion of Gross Private Capital Formation depends more on the state of entrepreneurs' profit expectations, rather than on lower interest rates..

      Profit expectations depend on entrepreneurs assesing likely aggregate demand over the life of new capital projects in relation to aggregate supply. If business confidence is low, then lowering interest rates through quantitative easing might not have the desired effect on new capital goods expansion.

      How do we know that asset prices must be higher than they would have been? How is this determined without some kind of empirical analysis?

      Does a fall in nominal interest rates below the so called natural rate of interest lead to mal-investments as ABC theory they claims? When a fall in interest rates does lead to rising entrepreneurs' expectations of profitability, in the light of unemployed resources, how is it possible to say that a mis-allocation can occur?

      ABC theory seems to me to imply Say's Law which Keynes refuted.

      John Arthur

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  3. LK I've read many times you criticise the ABCT for using the Wicksellian 'natural' rate of interest. But is such criticism still warranted considering the many examples to be found, one of which is as follows as written by Hulsmann:
    "The relevant benchmark was no longer the Wicksellian natural rate that would exist if the economy were a barter economy. It was rather the monetary interest rate that would exist in the absence of credit expansion.”… “In Human Action he (Mises) would eventually show that the relevant distinction is between the equilibrium rate of interest and the market rate. Both rates are monetary rates and can therefore coincide." (Mises: The Last Knight of Liberalism).
    ?
    It therefore seems you are using the Wicksellian 'natural' rate of interest to criticise ABCT, when ABCT doesn't use this 'natural' rate; you are erecting a strawman so to speak.

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    1. Hulsmann is trying to draw a distinction without much difference.

      His monetary equilibrium rate of interest is still a single rate supposed to clear the markets for real capital goods -- just as the earlier Wicksellian natural rate.

      In any case, Wicksell also could define the natural rate in this sense and earlier Austrians like Hayek did too, but it is still subject to the same critique:

      http://socialdemocracy21stcentury.blogspot.com/2014/10/how-did-wicksell-early-austrians-and.html

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    2. Adrian, i think your point is valid, but the ABCT "cleaned" in that way produces DIFFERENT (and probably, BETTER) predictions from the "classical" ABCT.

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    3. LK wrote: His (Mises') monetary equilibrium rate of interest is still a single rate supposed to clear the markets for real capital goods -- just as the earlier Wicksellian natural rate".

      Consider this as described by Cochran:
      "The real intertemporal pricing problem is the relationship between the prices of inputs applied at an earlier date to the prices of outputs available at a later date—the natural rate of interest in an Austrian model—and the market rate of interest in the loan market as influenced by credit creation" (Capital, Monetary Calculation, and the Trade Cycle: The Importance of Sound Money 2004”).

      You may here wag your finger and say but Cochran falls into the same trap and uses the 'natural rate of interest'. But in actuality what is meant by this is the price differential within and between stages of production.
      This component of the price differential (or interest rate) is not uniform within and between stages of production (unless in the ERE). The price differentials between the different stages of production in the manufacture of a car, are different to those of providing medical service.
      In fact ABCT rests on the basis that there are unsustainable price differentials between these very stages. So hence there is no 'natural uniform rate of interest' that can emerge other than in an ERE.
      Furthermore, to the extent that people defer consumption and save the money they receive for their contribution in the production process, they allow this saved money to be available for borrowing for production/consumption purposes. It is then the role of the banking system to loan this money to business/consumers at a specified rate of interest - the 'market rate of interest' (one would expect 'lower' market rate of interest to encourage borrowing). Credit expansion can also achieve the same result. But this credit expansion distorts the price differentials between the stages of production from what would otherwise have occurred absence the credit expansion. It is this which ABCT alludes to when using the term 'natural rate of interest', or to put it another way, the price differentials which would have 'naturally' occurred absence credit expansion. No uniform rate of interest emerges.
      At best your criticisms are semantic.

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    4. "So hence there is no 'natural uniform rate of interest' that can emerge other than in an ERE... etc."

      So you think the ABCT works without a natural rate of interest?

      Then clearly you don't even understand your own theory -- a contemptible failing common to many internet Austrians.

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    5. Adrian F. What do you mean by 'credit expansion' exactly? Because 'credit expansion' means lending and borrowing money.

      Also I don't see why you claim that the 'market rate of interest' is some hypothetical rate which only exists in the absence of credit expansion, given that credit expansion is a market activity.

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    6. Adrian, no, the problem is semantic in the sense that it's the meaning that is wrong, and not the wording. Let me summarize the most evident problems: 1) there is no single rate of interest 2) the rate of interests are not directly related to relative prices of goods at different "stages of production" because loans are not necessarily taken to buy goods at earlier or later stages of production 3) the concept of stage of production is itself not realistic because production is circular and not a one organized in stages 4) nobody forces anyone else to hold demand deposits at banks so there is no logical distinction between what you call "natural" and what you call "artificial".

      So the question is, given all these problems, can something be salvaged? And i think answer is yes, but it has nothing to do with the single rate of interest and nothing to do with stages of production, and everything to do with unwanted risks on the back of depositors or taxpayers. This is what i call the "cleaned" ABCT.

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    7. And by the way, if you're coming from "miseian" economics, perhaps you should also check out the following additional topics: the distinction between profits and interest rates, the distinction between time preferences and interest rates, the concept of durable goods, all the various aggregation fallacies on the "demand" side, uncertainty vs risk, incomplete vs imperfect information, Nash Equilibria...

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  4. From Murphy's absurd article:

    "However, what happens if interest rates fall not because of a genuine increase in saving by the public, but rather because central banks flood the financial sector with newly created money? According to the Austrians, this typical remedy merely sets off an unsustainable boom. Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.

    Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis."

    So according to Murphy, the US economy has been booming since 2008. And entrepreneurs have been feverishly engaging in so many long term investment projects that real resources (real savings) have become scarce, inevitably triggering a rapid rise in inflation.

    LOL

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    1. Exactly, his view is so bizarrely and blatantly opposed to the empirical evidence, it is insane.

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    2. Arguing that this passage does not match the facts is one thing. But look at it carefully. It does not cite or rely on other results from the ABCT. It is a self-contained argument. It is not contradicted by the existence of multiple rates of interest, since the argument is that this one particular rate has a strong effect on investment.

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    3. "It does not cite or rely on other results from the ABCT."

      Ken B,

      Good lord: that passage from Bob is text-book ABCT, certainly from the version of Mises. Just look here:

      http://socialdemocracy21stcentury.blogspot.com/2014/09/mises-early-austrian-business-cycle.html

      http://socialdemocracy21stcentury.blogspot.com/2014/09/a-brief-outline-of-mises-abct.html

      The final crisis in the classical ABCT is caused by scarcity and lack of physical capital goods so that more roundabout investment projects can't even be completed.

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    4. LK
      I don't care if it is. If I prove to you a lemma fro complex analysis and use only that lemma then my argument does not rely on the other results of complex analysis. Should those other parts be refuted ,y argument to you would be unaffected.
      So Murphy is arguing one specific thing: the own-rate of dollars got messed up, thus messing up investment. This may well be wrong, it may well be easily refuted empirically. But it does not rely on the own-rate of dollars being the same as the own-rate of komquats because that assumption is not part of the argument Murphy made in the DailyCaller.

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    5. Ken, according to Murphy's argument the US economy should have been in an investment boom since interest rates fell to supposedly 'unnaturally' low levels in 2008 as a result of all that fake money printing by the Fed. Apparently we are at the end of a massive investment boom, inflation and interest rates are rising steeply, with the rising interest rates making some of those boom-time long-term investments unprofitable.

      Therefore, of course, the Fed must raise interest rates always and everyone should buy gold.

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    6. Philippe
      Now that's an argument against Murphy's Dailycaller argument. A good one. What it isn't is a claim that Murphy is contradicting himself, or that the DC column is wrong because the thesis is right.
      What I am saying is, LK needs to argue like this and not chase imagined contradictions in the corpus of Murphy's writings. That's what Murphy does to Krugman right?

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  5. Murphy again:

    "what happens if interest rates fall not because of a genuine increase in saving by the public, , but rather because central banks flood the financial sector with newly created money?"

    Really? No increase in saving by the public?

    FRED: U.S. Net Private Saving

    https://research.stlouisfed.org/fred2/series/W202RC1Q027SBEA

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    1. No comment on this? It seems significant to me. Bob is saying that 'there's no saving' but the facts say otherwise. The private sector has been saving massively. That's why interest rates are low.

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    2. Krugtron on it:

      http://krugman.blogs.nytimes.com/2011/12/28/the-problem-2/

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    3. Of course, Murphy would say that interest rates have to be left "free" to reflect the savings rate, even if admits that the saving rate has risen, so he would have an answer.

      But that presupposes the absurd Wicksellian loanable funds theory which ABCT is dependent on too.

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    4. interest rates are 'free'. the Fed only sets certain short term rates. That's why you can get things such as inverted yield curves.

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  6. LK,
    So you have nothing to say when someone remarks that ABCT does not require a 'Wicksellian natural rate of interest' other than that they don't understand the ABCT?! And that's the basis of your argument?

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  7. The basis of my argument is years of careful reading of actual Austrian economists and their expositions of the ABCT, in which they state explicitly that the Wicksellian natural rate is the foundation of the theory, and as carefully documented by me in numerous posts:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/abct-without-unique-natural-rate-of.html

    http://socialdemocracy21stcentury.blogspot.com/2014/10/how-did-wicksell-early-austrians-and.html

    http://socialdemocracy21stcentury.blogspot.com/2014/09/mises-early-austrian-business-cycle.html

    http://socialdemocracy21stcentury.blogspot.com/2014/09/a-brief-outline-of-mises-abct.html

    http://socialdemocracy21stcentury.blogspot.com/2014/10/hayeks-prices-and-production-1935.html

    http://socialdemocracy21stcentury.blogspot.com/2014/11/rothbard-on-natural-rate.html

    http://socialdemocracy21stcentury.blogspot.com/2013/02/the-natural-rate-of-interest-in-abct.html

    http://socialdemocracy21stcentury.blogspot.com/2011/12/hayeks-natural-rate-on-capital-goods.html

    http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
    ---------------------
    This evidence is in contrast to the outrageous and laughable ignorance of hordes of internet Austrians like you.

    So feel free to actually read the evidence instead of talking B.S.

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  8. Wait a moment.
    Can we first agree I am one of the least likely people on the planet to defend Bob Murphy?
    But you talk about "own rates" for different commodities and Murphy is talking about the own-rate for just one: US dollars.
    That one rate can surely drive very many investment decisions, even if the own-rate for komquats is unchanged, right?
    The dollar's own-rate will drive more decision than the komquat's own-rate I think.
    And Murphy isn't laying out a grand theory, or even relying on its alleged theorems; his claim about the effect of the dollar's own-rate on investment -- whether empirically right ot wrong -- stands alone.
    So the fact there is no single natural rate of interest does not seem a strong objection to Murphy's argument in this instance..

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    1. Ken B,

      "Murphy is talking about the own-rate for just one: US dollars."

      Do you mean in “Multiple Interest Rates and Austrian Business Cycle Theory”??

      He does, I think, talk about exchange rates there, but I am talking about his Dailycaller.com article, which is quite clearly a defence of the classical ABCT, reliant on the unique, single Wicksellian natural rate. Here is the explicit passage:

      "According to Mises and his disciples, interest rates serve a vital function in a free-market economy. The legitimate market rate of interest signals the relative scarcity of savings versus investment opportunities. If the community is willing to defer immediate gratification by reducing consumption and saving more, then this frees up real resources."

      That is the Wicksellian natural rate that equates saving with investment and clears the markets for non-labour factor inputs.

      But Murphy rejects that very concept in “Multiple Interest Rates and Austrian Business Cycle Theory”.

      I'm not sure what you're referring to here.

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    3. Ignore Murphy's thesis. Look at what he argues in the DailyCaller. It animadverts to ABCT but does depend on it. It's not like he cites Mises as proving a result. The argument presented stands or falls on its own, as I have summarized it. You are chasing a Kontradiction in Murphy speak.

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    4. Btw, Callahan is on a twaddle binge. Noetic fields, no need to listen to arguments, doxa, god. It's a marvel to behold. Check out his latest on the historicity of the gospels. Clicking my name will get you links on my blog. An astonishing new form of apologetics: "its true no matter what the facts say." And again he seems to have stopped showing comments, both mine and a biologist I know.

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    5. Religions corrupts the mind, but, mind you, I think Rothbardianism and Marxism are very much like religion too.

      As to visions, why aren't the numerous visions ancient Greco-Roman pagans had proof of the existence of pagan gods?

      As to Jesus' resurrection, see some of my own critiques of this on my other blog:

      http://thoughtsphilosophyculture.blogspot.com/2012/07/william-lane-craig-versus-richard.html

      http://thoughtsphilosophyculture.blogspot.com/2012/05/joseph-of-arimathea-and-burial-of-jesus.html

      http://thoughtsphilosophyculture.blogspot.com/2012/05/robert-m-price-versus-william-lane.html

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    6. "It animadverts to ABCT but does depend on it."

      I regret I do not agree, Ken B. Murphy's DailyCaller article is just a recycling of the ABCT and does depend on it. If the interest rate is not the effective and reliable mechanism to clear capital goods markets, the theory falls over.

      Of course there are a vast range of other criticisms of ABCT that work against Bob's arguments here too:

      http://socialdemocracy21stcentury.blogspot.com/2013/12/daniel-kuehn-on-austrian-business-cycle.html

      http://socialdemocracy21stcentury.blogspot.com/2013/08/why-austrian-business-cycle-theory-is.html

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    7. "If the interest rate is not the effective and reliable mechanism to clear capital goods markets, the theory falls over"

      but there is also the view held by many mainstream economists that the supposed 'natural rate' is currently extremely low or negative. Murphy just assumes for no reason that that can't be the case, because 'money printing' is bad or whatever.

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  9. LK--this is slightly tangential, but do you know of any evaluations of the ABCT from an open economy perspective?

    Because it seems to me the logic of the theory breaks down not just when you assume multiple 'natural' rates of interest, but also when you assume an open economy--for example, any action the central bank takes to 'artificially' lower the interest rate (assuming, wrongly, that a singular natural rate even existed) by credit injection could be neutralized by countervailing forces that would produce an appreciation in the exchange rate of that CB's currency, like a round of devaluations in other currencies. An 'artificial lengthening of the structure of production' would no longer be a *necessary* consequence of the injection of credit into the economy by the CB.

    Do you know of anyone that has touched on these issues and evaluated the theory from this perspective?

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    1. I can't think of any off-hand.. sorry about this.

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    2. This comment has been removed by the author.

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  10. I had a look at the comments of the strange people who populate Bob's blog, and I saw that a lot of them seemed to be advocating a very funny idea.

    What they were saying is that a large fall in demand can have very negative effects on supply.

    For example, if there is a depression and a large number of workers and productive resources lay idle for an extended period of time, this can reduce the capacity of the society to produce desired goods.

    Who would have thought?

    So, apparently, the most logical response to a reduction in supply capacity created by a a reduction in demand is to reduce demand further by jacking up interest rates.

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    1. The people who populate Bob's blog are mostly irrational, ignorant and incapable of arguing without committing gross logical fallacies. I can't think of anyone who can argue in a minimally decent manner.

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    2. Keshav Srinivasan, if he is still there, and RPLong, if he is still there. A few of the atheists on the religion threads. But they are not Austrians. Mostly it's a sterling example of an epistemic closure machine in action.

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  11. I'm very very happy to see you focus on Austrian economics again! This is the very reason I come to this blog especially since nobody on the internet is focused on the subject. If I wanted to here criticisms about Marxism, the entire internet has arguments against them including wikipedia. I was also interested in your thoughts on post-modernism although I think there was a lot more digging on the subject. You only seemed to scratch the surface on the subject. You are doing great work. Thanks.

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    1. I hope to continue with some posts attacking Postmodernism at some stage, especially the work of that prize buffoon Derrida.

      In the meantime, I can recommend some excellent books that debunk Postmodernism and its Structuralist forbear:

      Merquior, Jose Guilherme. 1986. From Prague to Paris: A Critique of Structuralist and Post-Structuralist Thought. Verso, London.

      Jackson, Leonard. 1991. The Poverty of Structuralism: Structuralist Theory and Literature. Longman, London.

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  12. LK,
    Thanks for the links to your posts. I would first point out a few quarrels I have with some criticisms you make in them.
    LK writes in "a-brief-outline-of-mises-abct.html"

    “By the time of Human Action Mises replaces the unique Wicksellian natural rate with the single originary interest rate… but the two concepts are functional equivalents”.

    Mises writes in Human Action, “In the changing economy, there is no uniform rate of originary interest; there only prevails a tendency toward the establishment of such uniformity”.

    That pretty much clears up your incorrect claim that Mises’ interest rate theory is the “functional equivalent” of Wicksell’s.

    To the claim us “Internet Austrians” don’t even know the theory we are supporting, I quote Hulsmann, “There is no such thing as a natural rate of interest, defined as the rate of interest that would prevail in a barter economy. And even if there were such a “natural” rate of interest, it would still be irrelevant for the analysis of a monetary economy”(Mises – The Last Knight of Liberalism)

    Now I’m pretty sure Professor Hulsmann is not an “Internet Austrian”.
    Maybe it is LK that is out of touch with the Austrian theory!

    And most importantly, as I noticed in most of your posts, your main criticism against ABCT is the use of the Wicksellian ‘natural rate of interest’. I made the claim in the comments section that the ‘natural’ rate of interest does not emerge in a dynamic economy and hence is irrelevant. What matters is the unsustainable price differentials between the stages of production brought about by credit expansion; price differentials different to those that would have come about on a market without credit expansion.
    To which you replied: “So you think the ABCT works without a natural rate of interest?”

    So who better then Mises to tell you how it would work:
    “It has been asserted that the credit expansion is released by the rise in the rate of interest through the failure of the banks to raise their inter¬est rates in accordance with the rise in the "natural" rate. This argu¬ment too misses the main point of the monetary theory of the cycle. Whether the credit expansion gets under way because the banks ease credit terms, or because they fail to stiffen the terms in accordance with changed market conditions, is of minor importance. Decisive only is the fact that there is credit expansion because there exist institutions which consider it their task to influence interest rates by the granting of additional credit”.
    Footnote (to the above passage) “If a bank is unable to expand credit it cannot create an upswing even if it lowers its interest rate below the market rate. It would merely make a gift to its debtors. The conclusion to be drawn from the monetary theory of the cycle with regard to stabilizing measures is not the postulate that the banks should not lower the interest rate, but that they should not expand credit”(Interventionism: an economic analysis).

    To Philippe: Credit expansion in this sense means any money lent out by banks that is unbacked by savings.

    As an afterthought, I came across

    "http://www.economicthought.net/blog/2012/05/malinvestment-and-interest/"

    and realised it’s pretty much the identical debate. I realised I am late to the party, but I’m glad LK is still around.

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    1. (1) if you admit that natural rate of interest is non-existent, you have effectively admitted that vast numbers of Austrian books on the ABCT are worthless because virtually all of them use the natural rate or its functional equivalent.

      (2) you seem to be referring to the new version of the ABCT Hayek wrote in Profits, Interest and Investment (London, 1939) where the price differentials cause differences in the profit rate. That is just as worthless as the classical one with the natural rate. Why? It assumes the price system is highly flexible and responsive to demand, when this is B.S.

      Most prices are cost-based mark-up prices and do not change much in response demand, certainly not in the way required by the theory:

      http://socialdemocracy21stcentury.blogspot.com/p/there-is-mountain-of-empirical-evidence.html

      Also, the "Ricardo effect" is rubbish, as shown by Kaldor:

      Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.

      Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.

      Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.

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    2. "Credit expansion in this sense means any money lent out by banks that is unbacked by savings."

      Money lent out by banks is backed by savings.

      Banks have borrowers and depositors (savers). On the asset side of their balance sheet they have loans to borrowers, and on the liability side they have loans from depositors (savers). That's how they work.

      Please clarify what you meant by your comment.

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    3. http://socialdemocracy21stcentury.blogspot.it/2015/08/robert-murphy-defends-abct-even-though.html?showComment=1440778405294#c8826565932196739439

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    4. Some more points. First, not even in a "evenly rotating" economy there would be a single rate of interest, contrary to what Mises says, due to "liquidity" concerns. Second, ABCT stripped of single rate of interest anyway has plenty of additional problems that I've summarized in the link in my previous post. Third, even calling this theory an austrian theory is wrong, because it has nothing to do with austria, it's a von Bawerk-Wiskell-Mises-Hayek theory. Menger for example was in total disagreement with von Bawerk on interest. Another austrian found some scientific argument for progressive taxation. Etcetera etcetera...

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    5. Beside, even if the ABCT were valid, it would be a theory of slow growth not a theory of sudden crises.
      Endless problems and paradoxes. It's just false. Just be honest with yourself let it go. Don't follow the example of Marxists hehe :)

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  13. Hi LK

    Bob Murphy's statement that"Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks real savings to bring them to fruition".

    This implies saving determines investment and it is a lack of saving that prevents investment projects taking place. Rather it is investment that determines saving as in Keynesian economics.

    We have unemployed resources. A increase in quantitative easing means that funds for investment are available. In conditions of a less than full employment equilibrium, a lack of real saving will not be an impediment to investment if entrepreneurs' profit expectations are high.

    Aggregate Demand is the proceeds entrepreneurs expect to receive from offering a given level of employment. Aggregate Supply is the proceeds entrepreneurs need to receive ( proceeds that cover wages, rent, interest and normal profit) to induce them to offer a given level of employment. Equilibrium is determined by the point in which the AD schedule intersects the AS schedule. This is the point of effective demand and it need not be at full employment.

    The way to raise the level of employment is to raise effective demand through monetary and fiscal policy, not by raising the savings schedule.

    John Arthur

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    1. Rather, neither investment nor saving are well defined concept when used in a sense different from the system of national accounting. The theory that saving determines investment or the opposite theory are not even wrong.

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    2. Hi Anonymous,

      In a national accounting sense, saving always equals investment (or rather leakages from the circular flow equal injections). These are ex post identities.

      However, ex-ante saving does not equal investment. They are only equal in equilibrium (or rather ex-ante injections equal ax ante leakages only in equilibrium).

      An increase in Aggregate Demand occurs when there is an increase in planned (ex-ante) autonomous investment, planned net exports or planned Government expenditure or when there is a increase in planned autonomous consumption (say through a reduction in tax rates)..

      When Aggregate Demand exceeds Aggregate Supply due to an increase in planned investment, ex-ante investment exceeds ex-ante saving and firms notice their reduction in inventories on their shelves. Yet ex-post saving equals ex-post investment by the decrease in unplanned stocks of inventories.

      The economy is not in equilibrium at this point,since entrepreneurs expected receipts from their economic activity exceed the receipts they need to receive to induce them to offer the current level of employment. Firms are making short run super normal profits.

      This encourages further expansion as induced consumption expenditure increases from the incomes received from the initial planned investment expenditure.. This process continues until Aggregate Demand equals Aggregate Supply when firms are making normal profits and planned injections equal planned leakages (I+G+X = S+T+M). Actual injections always equal actual leakages but only in equilibrium do planned injections equal planned leakages. In equilibrium there are no unplanned inventories., whereas in disequilibrium there are.

      John Arthur

      P.S I have corrected a couple of mistakes on the post I just sent through.

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    3. John Arthur, you seem to be saying that unplanned inventories represent saving in excess of investment. However inventories are a form of investment, even if they are unplanned. As such investment = savings by definition, and not only in equilibrium.

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    4. John, thank you for clarifying but to be honest I'm not convinced. The national accounting terminology describes disequilibrium exactly like the terminology you're advocating. As i see it, saving is equal to investment because financial assets and financial liabilities have the same value and they cancel out.

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    5. John, I think that, in my terminology, what you're trying to say is this: businesses tend to make decisions according to the sales and inventory data instead of according to some grand plan about the future. Accordingly, monetary flows can have a very significant effect on employment and output.

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    6. Simon Wren-Lewis:

      "In the most simple model of a closed economy without government, income (Y) = consumption (C) + saving (S), but also expenditure (Y) = consumption (C) + investment (I). So S=I by definition. But here investment includes what is called ‘stockbuilding’ or ‘inventory accumulation’, which includes goods that firms wanted to sell but could not. To make this clear, lets split measured investment (I) into these two components: I=DK (buying new capital goods) +DS (stockbuilding). So if people consume less (C falls), but investment in new capital (DK) stays the same, measured investment rises because firms accumulate inventories of the goods that consumers did not buy (DS rises)."

      http://mainlymacro.blogspot.co.uk/2012/01/savings-equals-investment.html

      Brad DeLong:

      "The accounting identity that savings are equal to investment is true only under a particular definition of investment--one that counts unwanted growth in inventories as part of investment"

      http://delong.typepad.com/sdj/2009/01/eugene-fama-rederives-the-treasury-view-a-guestpost-from-montagu-norman.html

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    7. This is where the usual Austrian prevarication shows through. They deny there is such a thing as unwanted inventory. If you chose to make it you must want it. Prevarication on want/intend of course.

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    8. Ken, i don't think it's prevarication. It's just that we as society have two different definitions of "investment". I would say if we want to be serious, we've to pick one, and drop the other. I think the definition that does distinguish between planned inventory and unplanned inventory is more complex and tricky. Because as we all know, there are many unplanned things that happen in life...

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  14. Hi Philippe,

    There is nothing in the quotes from Wren Lewis and De Long that you supplied with which I disagree.

    In my first paragraph, I stated "In a national accounting sense, savings always equal investment..."

    Assuming a closed economy,I was trying to make a distinction between planned (or ex-ante) investment and savings which are not necessarily equal and realised (or ex-post) investment and saving which are always equal. Planned saving equals planned investment only in equilibrium.

    In an open mixed economy ex-ante I+G+X = S+T+M. This is always true ex-post but is only true ex-ante when Aggregate Demand equals Aggregate Supply.

    An unplanned decrease inventories represent ex-post investment this is not in intended investment and is a signal to entrepreneurs to raise production or to oder more inventories in the future.

    I did not say that a reduction in unintended inventories represents saving , though my wording may have been very clumsy and given you that impression..

    Hi Anonymous,

    If for example, Aggregate Supply exceeds Aggregate Demand at a given level of employment there is a build up of unplanned stocks above the level planned. Firms are making less than normal prof its and cut back production and Aggregate demand equals Aggregate Supply.

    When Aggregate Supply exceeds Aggregate Demand, planned savings exceed planned investment. As incomes fall, people save less until planned saving equals planned investment. Realised saving always equals realised investment. Realised investment equals planned investment + unplanned investment.

    You are right to think that in a monetary economy, I believe that monetary factors can play a role in affecting Aggregate Demand.

    I think a point I was trying to make was that firms are primarily quantity adjusters more than price adjusters, especially in administered markets (though this is more likely than there is an excess supply than an excess demand).

    Firms still have long-term plans as well as short term ones but there is considerable uncertainty with respect to long- run investment decisions

    I am not sure whether I have clarified my position or not

    Best wishes to both you and Philippe.

    John Arthur.





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    1. John, I simply don't like the terminology you propose. I also don't know who proposed it originally. Was he Davidson? Keynes? Someone else? Anyway, what benefits does it bring beside implying that firms mostly adapt their behavior by looking at their inventory levels?

      As i understand him, Simon Wren-Lewis assumes that any change in inventory is unplanned, and in my opinion this is just a kind of equilibrium worship that should not go into accounting. If you want to simplify your models with equilibrium assumptions, feel free to do it, but please don't mess with the accounting...

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    2. John, I've also to say this. I can intuitively get the point of planned and unplanned inventory. On the other hand, i can't get ex-ante and ex-post distinction. What is in-between these two? a mythical equilibrium maybe?

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    3. "As i understand him, Simon Wren-Lewis assumes that any change in inventory is unplanned, and in my opinion this is just a kind of equilibrium worship"

      No, it's neither of those things. It's simply that if you have inventories, you are investing in inventories. This is the case whether those inventories are planned, or unplanned (because you didn't sell as many goods as you had expected to).

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    4. Philippe, let's follow Wren-Lewis example. Isn't he saying that if consumers no longer consume, then necessarily the inventory stock will increase in an "unwanted" manner? But this doesn't follow without equilibrium assumption, no? Because without it, outflows and inflows from the inventory could go down at the same time.

      Here is the quote: "So if people consume less (C falls), but investment in new capital (DK) stays the same, measured investment rises because firms accumulate inventories of the goods that consumers did not buy (DS rises)."

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    5. Beside, in national accounting it's all flows. We're investing in inventories only when we produce goods and we hold these goods in the inventory until the end of the current period.

      The question then is: why production of goods that end up in inventories (in the sense I've just explained) and that are unwanted there (because we wanted to have more consumption instead of a rising inventory) should not be counted as investment? I don't see any good reason.

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    6. it's not equilibrium. The market didn't clear - sellers weren't able to sell the goods they wanted to sell and so they have ended up with unwanted inventories.

      I agree it makes sense to call this investment.

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    7. My error, because indeed even without equilibrium it may make sense to keep producing for some time even when sales are below expectations.

      Anyway the equilibrium is embedded into the argument later on when output level goes at the supposedly right level. In-between ex ante and ex post there is the equilibrium, and i don't want equilibrium assumptions to go into accounting.

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    8. "it may make sense to keep producing for some time even when sales are below expectations."

      It's not so much about that. It's just about companies ending up with larger inventories of goods because they didn't sell as many as they had expected to sell.

      Deciding to accumulate stocks of goods is an act of investment. This is still the case if those stocks accumulate accidentally, because sales fell unexpectedly.

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    9. "It's just about companies ending up with larger inventories of goods because they didn't sell as many as they had expected to sell." <- Larger than what? If you don't produce new ones, inventory can stay larger than your forecast, but can't grow! :)

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    10. Beside, John explained in another post there is no equilibrium in-between ex ante and ex post. He explained all ex-ante variables are essentially planned or expected quantities.

      This is logically coherent but leaves me as perplexed as i was at the beginning with the empirical meaning of sentences such as: "ex-ante investment determines ex-ante savings".

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    11. "Larger than what? If you don't produce new ones, inventory can stay larger than your forecast, but can't grow!"

      Right. Say, just for example, that companies usually expect to sell all their stock by the end of each period. In each period, (Y) = consumption (C) + investment (I).

      Let's say Y=100, C=80, and Investment in new capital goods = 20

      Then in one period C falls from 80 to 60, but Investment in new capital goods remains 20. The difference is made up by an unexpected accumulation of inventories equal to 20. So measured Investment rises as Consumption falls, but only in the form of Investment in inventories.

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    12. In theory investment could fall together with consumption and you wouldn't get rising inventory. But you could still get an inventory larger than you had forecast at the begin of the (observation) period. I think all this is clear to both now.

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  15. Hi Anonymous,

    An ex-ante and ex-post terminology was introduced into economics by Gunner Myrdal. (http://en.wikipedia.org/wiki/Ex-ante)

    Regards,

    John Arthur

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    1. Thank you very much. If the ex-ante stuff is only expectations and planning, and ex-post is only measurement, then I think it could work.

      I can imagine discrepancies between saving and investment because some expected financial asset may have no corresponding expected financial liability. Note i also count paper money as a financial thing.

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  16. John, so how do you know that (ex-ante) investment determines (ex ante) saving? You've watched inside the mind of entrepreneurs to discover how they do their planning? I'm just wondering, sincerely...

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    1. Hi Anonymous,

      Economic decision making by firms are based on the short-term and long-term expectations on the likelihood of them making a profit.

      Long-term new capital projects are based on a fair degree of uncertainty, especially concerning the probable discounted net cash flows in the later years of such projects.

      Of course no-one can look directly into the mind of entrepreneurs. to see if planned saving determines planned investment.

      Saving, in any time period, is abstention from current current consumption out of disposable income. It does not automatically lead to investment ( macroeconomically) .

      The decisions to invest are made by firms whereas decisions to save are made both by firms and by households.

      An attempt to increase saving by households ,out of a given level of income, leads to less actual saving as national income falls. This is the "paradox of thrift".

      An increase in autonomous investment increases national income by a multiplier amount as increased additional incomes lead to secondary rounds of consumption expenditure and leakages to saving. Each secondary round of consumption expenditure leads also to additional induced saving and this process continues and planned saving equals planned investment.

      John Arthur

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    2. John, I've heard these stories again and again, but they're just stories until empirical or logical arguments are provided to justify them.

      I would say it's also possible to tell opposite story. Example: expected savings cause expected investment, and income goes up.

      I also don't believe increase in ex-post investments necessarily bring with them increases in consumption.

      Basically, i think these are slogans, and they've some degree of plausibility, but is this a model that we can base policy on? I don't think so...

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    3. I would also try to be super careful in distinguishing the logical consequences (those coming from the accounting and terminology chosen), those who have some approximate (with various level of accuracy) empirical support. Also i think empirical facts obviously could change according to country (especially, i think developed vs developing). For example an African country maybe has no banking system, and state deficit may have to play the role of banking system, while this wouldn't be true in anglo country. Just an example.

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  17. LK,

    have you read this?:

    http://uneasymoney.com/2013/02/28/that-oh-so-elusive-natural-rate-of-interest/

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  18. LK,

    I'm curious to know whether you think ABCT could apply if we defined the natural rate of interest in a Keynesian way, that is as that rate necessary to make aggregate demand plug the gap between potential and actual employment.

    By this definition the economy is at full employment when interest rates equal their natural level. A further suppression of rates would lead to "overheating" of the economy--this is what we read in Bloomberg and other mainstream economic reporting.

    But isn't ABCT just a description of what we mean by the term "overheating"? The lower interest rates stimulate a higher volume of investment (which has a tendency to be long-term due to the greater effect of low rates on the net present value of "roundabout" projects). Lower interest rates also cause consumers to save less, creating the consumption boom described in Salerno's and Garrison's accounts of the ABCT. Prices begin to rise as the economy has surpassed full employment, and this leads to the failure of marginal investments and a battle for resources.

    I can't see a problem with this. Of course, most Austrians would be very unhappy with it because it does not provide grounds for the abolition of the Fed and other aggregate demand managers.

    I would be very interested to see a response to this LK. Your blog is a real gem in the econ blogosphere.

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    1. Anonymous@September 8, 2015 at 4:05 AM

      There are 2 issues here:

      (1) first on the natural rate of interest: I follow the heterodox Post Keynesian tradition which rejects the natural rate of interest as a concept that is relevant to real world capitalist economies. E.g., as Colin Rogers says:

      "The concept of the natural rate of interest is not merely non-operational: it is an abstract special case of no general theoretical significance. It cannot, therefore, provide the theoretical foundations for an operational loanable funds theory of the rate of interest” (Rogers, C. 2001. “Interest rate: natural,” in P. Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K, Routledge, London and New York. 545–547. p. 546).

      When you say this:

      "I'm curious to know whether you think ABCT could apply if we defined the natural rate of interest in a Keynesian way, that is as that rate necessary to make aggregate demand plug the gap between potential and actual employment. "

      I think you are thinking of "New Keynesian" macroeconomics. I don't accept New Keynesian thinking.

      (2) But even if you get "overheating", which is certainly possible and no one would deny this happens, there are so many other things wrong with the ABCT that the situation you describe can hardly be said to vindicate the Austrian theory. E.g., see my posts here:

      http://socialdemocracy21stcentury.blogspot.com/2013/12/daniel-kuehn-on-austrian-business-cycle.html

      http://socialdemocracy21stcentury.blogspot.com/2013/08/why-austrian-business-cycle-theory-is.html

      To give some examples:

      (1) The finding of Davis, Haltiwanger, and Schuh (1996) “suggests that most job creation (and destruction) happens at large, mature establishments which are presumably primarily making capacity-utilization decisions rather than new capital-expenditure decisions” (Kuehn 2013: 506). This totally contradicts the ABCT that says that liquidation of new higher order capital projects is what drives the bust.

      (2) Lengthening of the capital structure no doubt has some validity, but the capital structure actually “lengthens and contracts as a **consequence** of the business cycle, rather than as its cause” (Kuehn 2013: 523).

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  19. Wicksell to Austrians is what Malthus is to Keynes. Really - just because something is inspired by something else, it does not have to be the necessary and exact constituent. Wicksell is also used in Woodford's concepts of monetary policy, but no one would say that Woodford has to completely agree with Wicksell.
    The "natural" rate - the name coming from Wicksell - in the Austrian analysis is the money rate that would prevail under market conditions without the "credit expansion" (that one works differently with free bankers and differently with 100% reservers).
    There you go, I solved it for you, Lordy. ABCT does not have to assume Wicksell's natural rate, though it uses the same TERM.

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