tag:blogger.com,1999:blog-6245381193993153721.post992642338103984338..comments2024-03-17T00:23:24.896-07:00Comments on Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: ABCT without a Unique Natural Rate of Interest?Lord Keyneshttp://www.blogger.com/profile/06556863604205200159noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-6245381193993153721.post-19996282674634758922011-09-23T11:11:49.735-07:002011-09-23T11:11:49.735-07:00I think you got a little mixed up, Cahal. Perhaps...I think you got a little mixed up, Cahal. Perhaps you're thinking of S-I = G-T+(X-M) ?<br /><br />"The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents." - <a href="http://bilbo.economicoutlook.net/blog/?p=15813" rel="nofollow">Bill Mitchell</a><br /><br />If S were equal to I, then in this identity the only way that G could diverge from T is by way of the external account, which is obviously false. If we ever make the mistake of adopting a balanced budget amendment, on the other hand...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-47418461664708591822011-09-23T10:48:39.953-07:002011-09-23T10:48:39.953-07:00'Under what theory?'
It's an accounti...'Under what theory?'<br /><br />It's an accounting idendity so it is true by construction, no?Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-61639870650550208582011-09-23T07:19:25.131-07:002011-09-23T07:19:25.131-07:00"This makes little sense. S=I by DEFINITION,&...<i>"This makes little sense. S=I by DEFINITION,"</i><br /><br /><i>Under what theory?</i><br /><br />Under the theory that money holding is not saving, and that saving is only money USED for purposes other than consumption, i.e. lending, buying productive labor, buying a capital good, stock, that is, spending money for the purposes of making subsequent sales.<br /><br />If one assumes that holding cash is saving, then S can deviate from I.Petenoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-57937729375411776542011-09-23T07:15:28.912-07:002011-09-23T07:15:28.912-07:002/2
Now suppose that people started to abstain ...2/2<br /><br /><br /><br />Now suppose that people started to abstain from their consumption, and started to save and make productive expenditures, say 10% of their revenues, on labor and materials. This is the same thing as saying that people's time preferences have fallen. Since people are now making productive expenditures, they now incur money costs of production. If 10% of people's revenues are constantly spent on productive expenditures each period, say one year, then money costs of production would come to approach 10% of gross economic revenues, and profits would some to approach 90% of economic revenues. Profits have fallen. The rate of profit has gone from 100% on 0%, which is undefined (or infinite if calculus is used), to 90% on 10% capitals, which is a 900% rate of profit. (I am assuming one rate of profit because I assumed everyone is making 10% productive expenditures. In reality, this could differ from person to person, industry to industry).<br /><br />Since people are now abstaining from consumption, they can also lend and borrow money as well. What will the rates of interest tend to be? Well, we just have to consider what the incentives of the producers are. They have two main choices. They can either take their profits and reinvest them at the 900% rate, or they can lend them to others for interest. If they are faced with choosing between investing and earning 900% profit, or lending to others, then they will of course ask for a rate that tends to be no less than 900%. For if the rate offered by a borrower was lower, then a producer would tend to just reinvest their profits at the higher rate in production. Borrowers on the other hand, who are also earning 900% profit in their business, would find that if they don't offer a rate close to 900%, then other borrowers will outbid them. Other borrowers can do this because they are earning 900% profit on their capital as well, which means they can afford to pay 900% on loans. Remember, we are still assuming 10% investment out of gross revenues. All borrowing that goes to production would have to be made into that 10% investment.<br /><br />If we then imagine a separate economy, where people come to save 75% out of their gross revenues, then gross profits would be 25%, and the rate of profit on capital invested would be 25%/75%, or 33%. Interest rates would tend to be 33%.<br /><br />These two economies have different interest rates, naturally, and so we can say that multiple interest rates can exist between economies. If we then suppose that these two economies are just two different sectors or industries in the same economy, then it should be clear how the above determination of interest rates can apply to economies with multiple natural interest rates.Petenoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-82714814567455498222011-09-23T07:15:13.162-07:002011-09-23T07:15:13.162-07:001/2
Anonymous:
There isn't a single bank rat...1/2<br /><br />Anonymous:<br /><br /><i>There isn't a single bank rate for every single loan. There are rates for some maturity. So, if ALL bank rates are moved as the central banks moves the base rate, then some of the previous "malinvestments" will be adjusted.</i><br /><br />Indeed, but then because the rates are not natural rates, i.e. what would arise with voluntary savings and investment only, previous malinvestments would require correction, but new malinvestments would be made. As long as investors and consumers cannot observe the natural interest rates that would exist on an unhampered market, it is impossible for investors and consumers to use the price system to coordinate their actions inter-temporally. They have to guess.<br /><br /><i>One rate cannot equal all rates. If it moves in one sense, it will be closer to some and far from others. The cyclical movement is illogical, unnecessary.</i><br /><br />No, it's very much logical. The key is that inflation into the credit markets affects general interest rates, not just one in one sector or industry or individual person.<br /><br /><i>Ah, by the way, Pete, you could start thinking what is that determines the demand for these loans, and the interest rate they would be willing to pay. Remember, the article of 1932 is not the sole work of Sraffa, he also published a little book in 1960... <br />Pablo</i><br /><br />Interest rates in my view are determined by the rates of profit. The higher the rates of profit, the higher interest rates will be, and the lower the rates of profit are, the lower interest rates will be.<br /><br />What determines the rates of profit in the economy are people's time preferences.<br /><br />Suppose people consumed 100% out of their incomes. This is the same thing as saying that people's time preferences are maximally high. In this situation, nobody would make any productive expenditures, i.e. expenditures for the purpose of making subsequent sales. If nobody is making productive expenditures, it means that nobody would be incurring any money costs of production. There would be money revenues, as people sell their goods and services to others in exchange for money, but there would be no money costs. So the money profits would be the size of the money revenues. The rate of profit on capital would be infinite, since there is no capital invested.<br /><br />As for money interest, there would be no money interest because there are no money loans, there's just consumption spending. But originary interest, the Misesian concept of time preference of goods, would be considered maximally high.Petenoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-87583373267676911292011-09-23T06:38:58.905-07:002011-09-23T06:38:58.905-07:00"This makes little sense. S=I by DEFINITION,&...<i>"This makes little sense. S=I by DEFINITION,"</i><br /><br />Under what theory?Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-59031305098262257412011-09-23T06:30:24.619-07:002011-09-23T06:30:24.619-07:00“The supply and demand for loanable funds … identi...“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).<br /><br />This makes little sense. S=I by DEFINITION, so to say anything has to adjust for them to equilibrate is nonsensical.Cahalnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-22981500206061072112011-09-23T06:13:44.765-07:002011-09-23T06:13:44.765-07:00There isn't a single bank rate for every singl...There isn't a single bank rate for every single loan. There are rates for some maturity. So, if ALL bank rates are moved as the central banks moves the base rate, then some of the previous "malinvestments" will be adjusted. One rate cannot equal all rates. If it moves in one sense, it will be closer to some and far from others. The cyclical movement is illogical, unnecessary. Ah, by the way, Pete, you could start thinking what is that determines the demand for these loans, and the interest rate they would be willing to pay. Remember, the article of 1932 is not the sole work of Sraffa, he also published a little book in 1960... <br />Pablo.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-45926545998066223692011-09-23T05:18:42.443-07:002011-09-23T05:18:42.443-07:00Yes, there is a rather large burden on Austrians t...Yes, there is a rather large burden on Austrians to publish a more modern exposition of ABCT that takes into account the assumption of multiple natural interest rates.<br /><br />As it stands, it is incomplete in its details (just like all economic theories, for example the lack of detail in capital theory in Keynesian economics). This however does not mean that the core of the theory is refuted.<br /><br />As of now, no economist has shown how the introduction of multiple natural interest rates invalidates the essence of ABCT. Surely if multiple rates were so critical, you as an internet Keynesian would easily be able to show the logic of how it refutes ABCT.<br /><br />If I had to make a case for it, I would say that all that is necessary to show that ABCT is not refuted by the introduction of multiple natural rates is to take into account what Austrians (and hopefully Keynesians) already know, which is that prices and demand in certain projects, sectors, industries, etc, are more sensitive to prevailing market interest rates than other projects, sectors, industries, etc.<br /><br />For example, prices and demand in the housing (construction) industry is more sensitive to prevailing market rates than the plastics (manufacturing) industry is sensitive to prevailing interest rates.<br /><br />Since they are different industries, the rates can be assumed to be different in natura (so as to take into account the concept of multiple natural interest rates), and there would still be no loss of applicability of ABCT. All the other aspects of ABCT would then follow.<br /><br />Suppose the Fed lowers the overnight rate, which is a single rate, by inflating reserves until the banks set a lower overnight rate themselves. This increase in reserves will then influence the bank and lenders to set a whole new cluster of (lower than they otherwise would have been) interest rates, for various maturities, risk types, and industries.<br /><br />Since there is an increase in the supply of loanable funds, interest rates across the board will fall. By the same token, if there were fewer bank loans, banks and borrowers would set higher interest rates.<br /><br />As mentioned, the prices and demand in some industries are more sensitive to lowered interest rates than other industries. With lowered interest rates, housing becomes more attractive than manufacturing. During an inflationary boom then, we should expect to see relatively more labor go into construction than manufacturing, and once the Fed gets worried about rising inflation, they slow down, thus making the current structure unsustainable, and during a bust, we should expect to see unemployment rise by more in construction relative to manufacturing.<br /><br />http://images.mises.org/4682/Figure2.pngPetenoreply@blogger.com