tag:blogger.com,1999:blog-6245381193993153721.post3457158095608541623..comments2024-03-28T17:08:15.784-07:00Comments on Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: The Natural Rate of Interest in the ABCT: A Definition and Analysis Lord Keyneshttp://www.blogger.com/profile/06556863604205200159noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-6245381193993153721.post-53988278267532072282013-02-27T22:16:35.689-08:002013-02-27T22:16:35.689-08:00In other words "you can’t look at the equlibr...In other words "you can’t look at the equlibrium barter economy and tell me what “the natural rate” is supposed to be, even in principle" is a true statement but irreverent since in a money economy the only natural rate that matters is for money - though interest rates for other goods could in theory be derived based on expectations about their future money prices.Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-87459066624708565802013-02-27T22:08:18.458-08:002013-02-27T22:08:18.458-08:00I think Bob is over-complicating this issue. Lach...I think Bob is over-complicating this issue. Lachmann explained how the multiple-rates are derived and while this indeed means that in a barter-economy there will be no one natural rate , in a money economy it is only the natural rate for money that matters - it (plus money prices) will encapsulate information about all other goods interest rates<br /><br />Bob has promised a more detailed post to explain his views - I will wait until that appears to comment further.Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-79303692914930361282013-02-27T08:55:47.225-08:002013-02-27T08:55:47.225-08:00And regarding Lachmann's argument, Bob Murphy&...And regarding Lachmann's argument, Bob Murphy's comment here is as good an explanation as you can get:<br /><br /><i>Bob Murphy:<br /><br />Rob Rawlings, what Lachmann showed was that once you pick the numeraire, then the rates of return in barter are pinned down (in equilibrium) no matter what good you invest in.<br /><br />But that number can be different, depending on which good you pick.<br /><br /><b>So if there are n goods, in principle there could be n equally good “natural rates of interest,” even accounting for Lachmann’s point.</b> So when Hayek says the banks charge a money rate less than the natural rate, you can’t look at the equlibrium barter economy and tell me what “the natural rate” is supposed to be, even in principle.</i><br /><br />http://consultingbyrpm.com/blog/2013/02/i-am-officially-in-the-twilight-zone-callahan-and-glasner-on-sraffa-hayek.html#comment-58972<br />Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-70733002064821222712013-02-27T07:46:58.130-08:002013-02-27T07:46:58.130-08:00(1) please look at the way Hayek defined the natur...(1) please look at the way Hayek defined the natural rate:<br /><br /><i>"“Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, <b>because the demand for and the supply of capital do not meet in their natural form but in the form of money</b>, the quantity of which available for capital purposes may be arbitrarily changed by the banks. "</i><br /><br />The natural rate is <i>non-monetary</i> rate. It is imagined as an equilibrium rate on loans made in real goods. But there could be as many natural "equilibrium" rates in a barter economy as there are commodities lent out (as capital goods).<br /><br />Is this not clear?<br /><br />(2) <i>"But Hayek's theory is about what happens if one variable in the economy (interest rates) is deliberately lowered below its equilibrium rate. "</i><br /><br />No, it is about how a monetary/bank rate is <i>pushed below a single natural rate</i>. That rate does not exist outside equilibrium. So which "natural rate" (there might be thousands)?<br /><br />(3) No, Sraffa said no monetary rate can equal multiple natural rates.<br /><br />(4) <i>"Lachmann successfully refuted this charge by showing how even if the economy should be treated as a barter economy with multiple own-rates this did not stop there being an equilibrium set of rates around which the economy would tend to allign."</i><br /><br />Not sure if this is exactly what Lachmann thought he showed, but what use is that in <i>monetary</i> economy? It is irrelevant.<br /><br />(5) and, yes, the whole theory is unsound because its GE assumptions (the real existence of natural rates of interest, either monetary or in barter loans) is not true.<br /><br />Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-58132893839382160192013-02-27T07:11:26.210-08:002013-02-27T07:11:26.210-08:00Can you explain why you think that in a money econ...Can you explain why you think that in a money economy where all loans are issued in money there will be multiple rates (one for each commodity) ?<br /><br />I am missing why there would be. <br /><br />However, even if there were (as there would under barter in theory) Lachmann shows how they would align.<br /><br />Now of course in the real economy prices and interest rates are constantly out of equilibrium. This doesn't mean that equilibrium doesn't exists - just that things move too fast in the economy for everyone plans to be fully correlated. <br /><br />But Hayek's theory is about what happens if one variable in the economy (interest rates) is deliberately lowered below its equilibrium rate. Like a lot of economic theories (including ones used by post-Keynsians) it can best be demonstrated in a model where equilibrium is assumed to exists. But this in no way means it fails to operate in a world of dis-equilibrium - just that it will not be seen in the pure form of the model.<br /><br />Straffa tried to say that Hayek's theory was incoherent because the concept of a "natural" rate of interest didn't exists as a result of multiple own rates existing in a barter economy.<br /><br />Lachmann successfully refuted this charge by showing how even if the economy should be treated as a barter economy with multiple own-rates this did not stop there being an equilibrium set of rates around which the economy would tend to allign.<br /><br />Now: You can reject Hayek's theory on other grounds but I don't think you can use Straffa any more - Lachmann has shown his arguments to be invalid<br />Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-20234039161887588602013-02-26T21:17:14.413-08:002013-02-26T21:17:14.413-08:00Excellent Lord Keynes!And here is some good explan...Excellent Lord Keynes!And here is some good explanaitions how those ideas have got such wide spreading:Thom Hartmann<br />https://www.youtube.com/watch?v=jymMb6t1LSc<br />and this article by:<br />Mike Davis-New Left Review 79, January-February 2013<br />http://newleftreview.org/II/79/mike-davis-the-last-white-electionAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-81054326747159964542013-02-26T16:33:41.063-08:002013-02-26T16:33:41.063-08:00" Out of equilibrium there will be arbitrage ...<i>" Out of equilibrium there will be arbitrage opportunities that will tend to move them towards alignment."</i><br /><br />Even if you accept that argument, there will still be multiple rates, unless you get to a GE state (which will never happen).<br /><br />None of this will salvage the ABCT based on the natural rate.<br /><br /><i>"There will be different interest rates to reflect different terms and different risks - but what has this got to do with multiple own-rates of interest for different commodities? "</i><br /><br />Very little. That's why monetary rates will never align with own rates. <br /><br />The whole theory is incoherent.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-32829611407995915192013-02-26T14:58:54.260-08:002013-02-26T14:58:54.260-08:00'(5) therefore (by the internal logic of Hayek...'(5) therefore (by the internal logic of Hayek’s theory) no monetary system where capital goods investments are made by means of money can hit the right equilibrium natural interest rate on each in natura loan of various capital goods, because there is no such thing as a unique “natural rate.”'<br /><br />This is very confused. <br /><br />In a barter system where loans are made in many different commodities each one would have an own-rate of interest. This would reflect the underlying natural rate of interest plus expectations about each commodities expected change in relative value with respect to other commodities. In equilibrium all these rates would be aligned. Out of equilibrium there will be arbitrage opportunities that will tend to move them towards alignment. Equilibrium doesn't mean they will all be the same value - just that they all will reflect the same expectations about future price movements.<br /><br />Lachmann explains why this doesn't present any particular theoretcial problem<br /><br />Move away from a barter economy to a monetary one. All loans are made in money. There will be different interest rates to reflect different terms and different risks - but what has this got to do with multiple own-rates of interest for different commodities? One set of interest rates (the natural rate) will allow market participants to align their plans for production and consumption at an optimal level.<br /><br /><br />Hayek's theory is that if the banking system creates too much money and causes the interest rates to drop below this equilibrium then this will create a tendency for distortions in the price structure that will favor too much long term investments than can be sustained by the structure of demand in the economy (cause people's plans to become mis-alligned).<br /><br /><br /><br /><br />Rob Rawlingsnoreply@blogger.com