Friday, May 18, 2012

Catalán on the Wicksellian Natural Rate of Interest

I direct readers again to the ever interesting Jonathan Finegold Catalán, and his new post on the Wicksellian natural rate of interest and how Mises abandoned it:
Jonathan Finegold Catalán, “Malinvestment and Interest,” Economic Thought, 18 May, 2012.
Two points:
(1) At the end of his post, Catalán asserts:
“This does not mean that rate of interest is unimportant; just that Austrian capital theory does not hinge on the concept of a “natural rate of interest.”
Well, Austrian capital theory might not, but what about the Austrian business cycle theory (ABCT)? For Roger Garrison, the leading modern exponent of ABCT, uses the concept called a “market-clearing or equilibrium rate,” and he appears to mean by it the natural rate of Hayek:
“The supply and demand for loanable funds … identify a market-clearing, or equilibrium, rate of interest ..., at which saving (S) and investment (I) are brought into equality.” (Garrison 2000: 39).
On that same page in Time and Money: The Macroeconomics of Capital Structure (2000), Garrison makes it clear that this rate is essentially the Wicksellian rate causing intertemporal equilibrium or dis-equilibrium.

One can also read Garrison’s “Natural and Neutral Rates of Interest in Theory and Policy Formulation”:
“So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. .... the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy’s productive capacity in ways that are consistent with people’s willingness to postpone consumption. In the hands of the Austrian economists, the natural rate became the rate that reflects the time preferences of market participants and allocates resources among the temporally defined stages of production. The output of one stage serves as input to the next in this logical and broadly descriptive representation of the economy’s production process. The temporal dimension of the economy’s capital structure is a key macroeconomic variable in Austrian theory. .... In summary terms, the natural rate is seen as an equilibrating rate. It is the rate that tells the truth about the availability of resources for meeting present and future consumer demands, allowing production plans to be kept in line with the preferred pattern of consumption. By implication, an unnatural, or artificial, rate of interest is a rate that reflects some extra-market influence and that creates a disconnection between intertemporal consumption preferences and intertemporal production plans” (Garrison 2006: 58–59).
What are we to make of an Austrian theory whose leading theorist still embraces a non-existent, Wicksellian natural rate?

(2) Catalán asserts:
“... the crucial aspect of Austrian capital theory is not the derivation of the rate of interest but, in Sraffian terms, the inducement of severe intertemporal resource misallocation. The underlining requirement for Austrian business cycle — and this is clear even in Hayek’s Prices and Production — is an increase in the stock of money representing savings and the distribution of this money to entrepreneurs. This is why, in Human Action, Mises gives more weight to fiduciary expansion than the rate of interest.”
But what happens when the economy is in a state of idle capital goods, mass unemployment and idle resources? But then the following logically follows:
“In the British situation of 1932, Hayek and his friends rejected the proposals of Keynes and some non-Keynesian British economists – that at the bottom of the depression the government should take certain steps, and so on. Hayek has now realised that that was wrong. That is to say, I think Austrians today would not reject all measures to relieve unemployment and increase employment, in a situation in which nothing really is scarce. And in this respect I think Austrians … would have … have ... learned.”
Click on the link to see what horrible enemy of freedom said this, or go here or here and read more (hint: it wasn’t Paul Krugman!).

When Catalán states that “Mises gives more weight to fiduciary expansion than the rate of interest,” then presumably fiduciary expansion is also a more important cause of an Austrian business cycle (ABC) than the interest rate. Clearly, this requires that fiduciary expansion is a sufficient cause for an ABC.

Does this not contradict Catalán’s earlier post? We are supposed to believe that a free banking system would avoid over-expansion of credit, but, as I have shown here, a real world case that approximates the free bankers’ utopia – Australia in the 19th century – does not support their idea at all.


Garrison, R. W. 2000. Time and Money: The Macroeconomics of Capital Structure, Routledge, London and New York.

Garrison, R. W. 2006. “Natural and Neutral Rates of Interest in Theory and Policy Formulation,” Quarterly Journal of Austrian Economics 9.4: 57–68.


  1. You really need to fill in the blanks. That the emphasis is on fiduciary expansion doesn't mean that any amount of fiduciary expansion is distortionary. And that Garrison uses the idea of a natural rate of interest doesn't mean that it's necessary for austrian business cycle theory. I'll also add that Hayek's Profits, Interest, and Investment assumes several of the qualities that you have argued Austrian theory assumes away (i.e. idle resources, etc). Idle resources doesn't equate to suberabundance and it doesn't mean that resources don't need to be economized.

    1. (1) "That the emphasis is on fiduciary expansion doesn't mean that any amount of fiduciary expansion is distortionary."

      Here, then, you are admitting that an economy might be able to deal with increased demand for capital goods without an ABC, when money supply rises.

      If that is true, then why can't money expansion of an endogenous money system with a central bank work in the same way? (cause development without ABCs)

      (2) "And that Garrison uses the idea of a natural rate of interest doesn't mean that it's necessary for austrian business cycle theory."

      Well, I am glad you appear to admit Garrison's exposition is flawed by his use of the Wicksellian natural rate.

    2. LK, by the way did you know that Keynes and Wicksell actually meet once? Torsten Gårdlund writes: Knut Wicksell had in 1916 received 1000 crowns of the central bank in middle of the war to travel to England to study its economic policy ... home to his wife Wicksell tells in a letter that he had the opportunity to eat lunch with Keynes, then an official of the British Treasury. Wicksell says: "However, it is a sharp head and, as I said, I acquired a good deal of the conversation;I would only wish it had lasted longer, now he must go as soon as the lunch with coffee was over - I still followed him on foot to his barbershop" -Gårdlund, Torsten, 1990, Knut Wicksell, SNS
      Publishers, Stockholm, p 326.

  2. I don't see the logic in what you say. How has the alleged failure of free banking in Australia got anything to do with Catalán's post?

    I think it would be more useful if you used your obvious talents in economic theory to search for truth rather than twisting others arguments for self-serving ends.

    1. "Does this not contradict Catalán’s earlier post?"

      If you can't see the connection, then you're wasting your time here.

  3. Isn't this the umpteenth time that we have been through this, Lord keynes? That the natural rate of interest is conducted in terms of money and that the later Mises and Rothbard understood this. Yes, Hayek did not, and since he was fundamentallly Walrasian in some respects he had to concede to Sraffa this that other Austrians wouldn't. Hayek made important contributions to capital theory, but that does not mean everything he wrote was right. Criticizing austrians on this point is like quoting william stanely jevons as proof modern neoclassicals use cardinal utility when constructing demand curves.

    1. You're wrong.

      Garrison expounds a Haykeian version of the ABCT - with the Wicksellian natural rate.

      Therefore Sraffa's critique is still relevant.

    2. No, you're wrong.

      I never said that modern Austrian economics doesn't utilize a "natural rate of interest", what I keep saying, over and over again whenever this supposed "critique" occurs, is that it is conducted in terms of money, because we are analyzing the the economics of the catallaxy. Since money can be aggregated and different rates of return arbitraged, in the ERE there can exist one rate of interest. And while this rate may never appear in the real economy, arbirage forces always exist trying to fruitlessly propel it towards. No modern austrian economist conducts his constructs with the belief that they are analyzing a barter economy.

      While the Mises in TMC might have made such an error, the older Mises evolved his ideas and emphasized interest in the economy is conducted in terms of money.

      As Salerno writes (with a quote from Mises)

      "Not only does Mises conceive the interest rate as a potential cost
      of holding money, he also recognizes that it is a monetary phenomenon
      in a real and important sense. That is, in a barter economy, where
      monetary calculation does not exist, it would be impossible to even
      conceive the difference in value between present and future goods as
      a unitary rate. The reason, as Mises points out, is that “Only within a
      money economy can this value difference be comprehended in the
      abstract and separated from changes in the valuation of individual
      concrete economic goods. In a barter economy, the phenomenon of
      interest could never be isolated from the evaluation of future price
      movements of individual goods.”"

  4. Lord Keynes,

    You've attacked Austrians for a while now to some degree, which is somewhat easy, as the Rothbardian cult is something of a low hanging fruit. WHat about neo-Friedmanites and market monetarists? might I suggest the money illusion by scott sumner, and macro market musings by David Becker. It would by interesting hearing you on their blogs, in critique or in agreement

    1. Austrians are way more interesting, though. Plus, market monetarists don't seem to understand the mechanics of banking well enough to have a policy prescription worth debating. They're just another trope on the typical mainstream, exogenous money approach, long since falsified.

  5. Glad to see you get owned by Bob Murphy here:

    1. He's wrong:

  6. Jan said: I notice that "Austrian schoolar´s" of differnt variations don´t fully understand and diminish Knut Wicksell´s work.He worked on many fields of economy in a period of Goldstandard and other limitations,at the time when marginal-utiliy theory was just delivered.He lived from 1851–1926.He unlike Austrian schoolars was in constant change,curios,inventive and a progressive economist.His Natural-Rate concept,was merely fictive and he even in some of his writings condemn in it.There is two way to use Wicksell´s work.As Austrian schoolar´s to focus on some concept of Wicksell (Natural-Rate) and slavish use this as dogma.The other way is like J.M Keynes,Gunnar Myrdal,Joseph Schumpeter and many other build further on some of the observations of Wicksell,like his cumulative process ideas of growth and recession and disequilibrium,and his early theory of endogenous money,etc.It was so his own followers and students in his own country Sweden dealed with him.It made them able at early years in a unortodox way meet the 1930ts depression with a progressive kit-bag of tools to intervene and use a Keynsian-like economic policy to end the depression.