Sunday, August 4, 2013

Reply to Juan Ramón Rallo, Part 3

Juan Ramón Rallo provides another reply to me here:
“Nueva réplica a Lord Keynes: preferencia temporal y tipos de interés (parte 3),” 4 August.
At this point, I suspect further argument on each specific point seems unnecessary, as (1) I do not see much that has changed from his previous comments, and (2) no doubt language difficulties obscure proper understanding on both sides.

I would stress that I support Post Keynesianism, and perhaps Juan Ramón Rallo is unfamiliar with Post Keynesian economic theory.

But be that as it may:
(1) Rallo seems to say he concedes nothing about Sraffa (“Temo no haber concedido nada en relación con Sraffa”).

If that is so, it means we are back to square one.

But, for an examination of why Lachmann’s response to Sraffa fails, see (of all people!) the work of the Austrian Robert P. Murphy:
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.
(2) That hoarding of money or spending on liquid financial assets is a way “to hedge against uncertainty” is also a standard Post Keynesian view, so Rallo’s point (1.4) has no force against me.

Rallo says that “from an individual perspective it is clear that hoarding is not only saving money but also investment: investment in liquid assets,” and that, because of the deflationary pressures hoarding causes, it is therefore a “profitable production processes aimed at making money” (“rentabilizar los procesos productivos dirigidos a fabricar dinero: es, por consiguiente, una inversión productiva en dinero”).

That severe macroeconomic problems would not be caused by a (1) sufficient level of hoarding, (2) unwillingness to spend on newly produced goods and services and (3) inducement of deflationary pressures can only be maintained by someone ignorant of the effect that these things would have on business expectations, investment and exacerbation of debt deflationary processes.

(3) Regarding the capital structure of real world capitalism economies, there is a simple empirical example that shows how unrealistic the Austrian view is: the post-WWII growth of the US economy from 1946–1948.

On any Austrian view, there must have been massive malinvestment in the US during the years from 1941 to 1945. When the war ended, many factories and capital goods no doubt were no longer useful, but many others were. Yet other capital was malleable and adaptable.

If the Austrian theory of capital were true, there should have been a devastating US depression after WWII as malinvestments were liquidated and unemployment soared (even if we take account of government programs like the G.I. Bill). But instead the economy adjusted rapidly and boomed: real GDP did indeed fall as war output was ended, but conversion occurred with remarkable speed and success.

(4) Rallo says that he does not think fractional reserve banking is fraud, so that I was wrong in thinking that. Fair enough. I was wrong.

Instead, the “maturity mismatch” is the issue. “Maturity mismatch,” he says, causes intertemporal discoordination: banks provide (1) demand deposits repayable on demand but (2) also fund capital investments with medium to long term loans, which (allegedly) causes a mismatch between real saving and real investment.

First, I am mystified how anyone can say that “[n]one of this has to do with fractional reserve banking” (!) (“Nada de esto tiene que ver con la reserva fraccionaria”). On the contrary, the “maturity mismatch” Rallo speaks of cannot but be the result of fractional reserve banks offering demand deposits and making money by lending with time/term deposits.

Secondly, again we are back to the erroneous time preference theory of interest rates, the requirement that an economy is running at full employment, and the inability to understand that modern capitalist economies require endogenous money systems and the creation of new credit money to achieve strong investment and growth.


  1. "When the war ended, many factories and capital goods no doubt were no longer useful"
    Sure, but ABCT doesn't say a malinvestment-boom has necessarily occurred *just* because people made a bunch of factories which can't sustainably generate a profit in a peacetime economy, or that a recession is imminent *just* because there are a lot of factories recently built that can't sustainably generate a profit in a peacetime economy.. Americans made the factories by working very hard and, very important here, sacrificing the consumption of a lot of consumer goods. They weren't made because of FRB/unsustainable credit expansion/money supply surge/etc. During the 2000s, people weren't eating a lot less butter/etc, nor was there a huge increase in industrial capacity (consumer goods production plus retoolable military factories) to avoid being ruled by fascists.

    1. Of course the banking system financed a lot of the wartime investment. You are ignorant.

  2. Sure. I didn't say they didn't. My point was that the financing of the war spending didn't come *just/primarily* from the banking system (which is because we're discussing ABCT). A lot of it came from two sources:
    1) A big drop in consumption of consumer goods
    2) A *lot* of financing from earnings/savings from Americans buying war bonds.
    It's not like during WW2 the govt. tried to finance the war just using the Fed without there being a drop in consumer goods production or a big buying up of war bonds using actual earnings/savings from money that was there to begin with.
    I doubt you were ignorant of these 2 points. You just seem to be more concerned with not being open to to the possibility that you've made invalid arguments against a flawed business cycle theory than getting better at critiquing it.