tag:blogger.com,1999:blog-6245381193993153721.post4661834295201674771..comments2024-03-17T00:23:24.896-07:00Comments on Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: Another Example of Wicksell’s Second Definition of the Natural Rate of InterestLord Keyneshttp://www.blogger.com/profile/06556863604205200159noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-6245381193993153721.post-46715451921844768612014-10-09T17:02:31.682-07:002014-10-09T17:02:31.682-07:00Quick question: When speaking of "interest&qu...Quick question: When speaking of "interest" does Wicksell mean interest on <i>loans</i> or does he mean unlevered cost of capital? <br /><br />If he means the former (which is the impression I get) then the theory is subject to another criticism. For the expected (mean) rate of profit <i>at best</i> would be an upper limit for which funds would be borrowed. <br /><br />If the interest rate is the same as the rate of profit, then all else being equal, I would always prefer loaning money than investing in capital. It allows me to get the same expected rate of return at a much lower risk. <br /><br />From a financing standpoint, if the rate of profits are <i>certain</i>, then I might borrow up to (but just below) the rate of profit. But even if we ignore Knightian uncertainty, we might still insist that profits are a random variable following some distribution in which case profits aren't certain. <br /><br />I, and any sensible business person, would want to include a margin of safety between the expected rate of return on the capital asset and the interest paid for financing that asset. <br /><br />And my guess is there's a lot of "wiggle room" in how much of a margin of safety is required. If there's a good deal of perceived uncertainty, borrowers will be reluctant to borrow unless they're confident that there's a decent margin of safety between expected returns and the interest rate. <br /><br />So if there is a "natural rate of interest" (in the above sense), I doubt it would be a precise value but at some discount to the ("uniform") rate of profit. <br /><br />The rate of profit would, at best, be an unstable equilibrium.<br /><br />. . .<br /><br />Regarding the circularity you mention at the end, what about newly created capital? I realize the value of existing capital will depend upon the interest rate but the value of new capital will give a potentially different price.Samuel Gotihttps://www.blogger.com/profile/07700141552017540854noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-55384690401472300642014-10-09T03:57:05.098-07:002014-10-09T03:57:05.098-07:00In the Cambridge Capital Controversies, frequent r...In the Cambridge Capital Controversies, frequent reference is made to "Wicksell effects". I think that Wicksell had a good grasp on price Wicksell effects and why, therefore in equilibrium, the marginal product of capital would be unequal to the interest rate. I would be surprised to find in Wicksell, however, a recognition of the possibility of perverse Wicksell effect.<br /><br />I, too, like Myrdal's Monetary Equilibrium. I do not find it as clearly revolutionary as Keynes General Theory, perhaps because I do not understand the context well enough. Which follower of Wicksell - was it Lindah? - came up with the phrases "ex ante savings" and "ex post" savings? This, I gather, leads to a clearer way of distinguishing between the equality of savings and investment as an equilibrium condition and as an accounting definition - a distinction one can criticize Keynes as none too clear on in his exposition.<br /><br />I find Myrdal's book makes clear that Wicksell thought the natural rate of interest had multiple implications that Myrdal argued might not all hold at once: clearing the market for the supply and demand of "real" capital, clearing the market for loanable funds (savings and investment in money terms), and keeping the price level stable. I probably never had an opinion on which of these was supposed to be a definition in Wicksell and which were supposed to follow.Robert Vienneauhttps://www.blogger.com/profile/00872510108133281526noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-39929685871800834672014-10-08T18:14:44.650-07:002014-10-08T18:14:44.650-07:00LK, if you could get over or Wicksells closets ade...LK, if you could get over or Wicksells closets adept Erik Lindahl´s 1939 book: <br />"Studies in the Theory of Money and Capital" <br />and also maybee Erik Lundbergs 1937 dissertation "Theory of Economic Expansion" and his<br />The Development of Swedish<br />and Keynesian Macroeconomic Theory and<br />its Impact on Economic Policy "<br />Cambridge University Press, Cambridge 1996<br />there is an rather good overview of the different uses of Wicksell´s natural rate by him others.They also interesting in the sence, since they write about how Wicksell, Keynes and Hayek etc use the natural rate framework. And yes it´s true,Wicksell never really gave any clear definition of the natural rate.In his writings in swedish you could find i think at least even 10 more definitions of this "magical" natural rate.In his more policy directed writings,he did not hardly use the term.Janhttps://www.blogger.com/profile/13321416654318469280noreply@blogger.com