Thursday, June 23, 2011

Two thoughtful posts on ABCT

First, LK talks about the differences between Hayek and Mises on business cycle theory.

Second, Ryan Murphy has some really great thoughts up on ABCT and QEII. Everyone should read through it carefully. Ryan can correct me if I'm wrong, but I think Garrison offers this to us on pages 161-163. This section of my book is laced with outraged margin notes. The reason, as you might guess, is his neglect of the liquidity preference theory of interest in presenting the Keynesian argument, which allows him to easily refute it later on.

What is new that Ryan brings to the discussion, I think, is thinking about these dynamics in the context of QEII, IOR, and money demand.

Enjoy.

UPDATE: Ryan shares these thoughts over email - "Garrison had the supply curve moving rightwards because they were increasing savings at the expense of consumption (I, too, see no reason for this to screw things up). What I have is a leftward shift in the supply of loanable funds as consumers build up greater cash reserves. Or in the case of today, banks continually stockpiling money so they can earn more interest."

35 comments:

  1. Where I disagree is that Garrison has the supply for loanable funds shifting outward as people shift out of consumption and into savings. I have it shifting leftwards as banks sit on money that gets injected into the system.

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  2. Once again, LK overanalyzes a few sentences of Kirzner and Hayek into some wild conclusion that Mises and Hayek were inconsistent or deviant.

    The truth is, Mises in 1912 didn't incorporate a lot of the more developed capital theory that Hayek produces in P&P and PToC. It wasn't until Human Action where Mises finishes the theory. As someone who's read Human Action more than once, let me assure you that Mises absolutely had in mind the distortion of the structure of production in his account. I can quote a dozen places where this is so.

    The differences were semantic and emphasis based. Just like I wouldn't argue that Keynesian business cycle theory discounts sectoral imbalances - I would argue it marginalizes or de-emphasizes it; I wouldn't argue that Mises was only concerned with monetary and credit matters, and didn't think about the SoP - I would say he didn't know as much as he did 37 years later thanks to Hayek and others (is this surprising)?

    No Austrian finds this biography surprising, just as no scholar of american history would find the differing views of the founders surprising. What is surprising is the attempt to put them at war with each other ideologically - or to suggest that Mises' greatest colleague and disciple isn't consistent with Mises' own path breaking work.

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  3. I have to agree with Mattheus. LK doesn't really understand what he's writing on. He acts as if Mises' and Hayek's conceptions of the natural rate of interest are different. They really aren't. He gets caught up on the fact that the two might use different names for the same concept.

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  4. As someone who's read Human Action more than once, let me assure you that Mises absolutely had in mind the distortion of the structure of production in his account. I can quote a dozen places where this is so.

    And in my post I am talking mainly about the Theory of Money of Credit and the possible differences between his earlier published work and his oral teaching, as noted by Hayek.

    Also, explain what Kirzner means by “I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912”.

    It is Alan O. Ebenstein who claims that even in Human Action, Mises' ABCT is different from Hayek's.

    Name these "dozen places [in Human Action] where this is so".

    Talk is cheap.

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  5. "He acts as if Mises' and Hayek's conceptions of the natural rate of interest are different. They really aren't. "

    Jon Catalán,

    You have no idea what you're talking about.
    I am WELL aware that Mises' originary rate and his subsequent talk of a pure rate in his exposition of ABCT by the time of Human Action is reallynot that much different from Hayek's Wicksellian natural rate.

    I have discussed it here:

    http://socialdemocracy21stcentury.blogspot.com/2011/06/misess-originary-interest-rate-theory.html

    "the originary interest is a future discounted good exchanging for a present good of higher value.

    In terms of capital goods, this presumably means the discounted value of future goods against present goods that are borrowed now for capital goods investment.

    But this is really just another real theory of the interest rate where loans are imagined as occurring in natura, or in real commodities in an economy at full employment. Mises is still subject to Sraffa’s critique of Hayek."

    The unique natural rate of interest in a growing economy is an inoperable, invalid concept, rendering ABCT total garbage.

    Basically, Sraffa shot Hayek down in flames in 1931 and yet Austrians are stil recycling the same nonsensical theories, as if nothing happened.

    In Garrison’s book Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000), the word “Sraffa” does not (as far as I can see) even appear. It’s as if the Hayek–Sraffa exchange never occurred.

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  6. Even in "The Theory of Money and Credit" Mises uses the concept of a distorted structure of production. See Chapter 19 where he spells it out explicitly using Bohm-Bawerk's interest theory. http://mises.org/books/Theory_Money_Credit/Part3_Ch19.aspx#_sec2

    There are differences though, in "Profit, Interest and Investment" Hayek modifies his theory of ABCT from it's earlier form. He then modifies it again in "The Pure Theory of Capital". I've always thought it strange that Garrison defends Hayek's earlier theories rather than the full-blown later versions even when Hayek himself admitted those earlier theories were inadequate. That said "Pure Theory of Capital" is too complicated. There are several more modern Austrian approaches that deal with things more tidily.

    I find the debate over Sraffa's critiques of Hayek interesting. It's something I'm going to write about if I get the time.

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  7. Also, explain what Kirzner means by “I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912”.

    Mises offered a monetary explanation for the business cycle in 1912. Hayek later explained the real component behind it - namely, the flow of capital goods, the time structure of production, and how this affects profits through an economy.

    It's "not quite consistent" because they're not the same topic. Hayek was explaining mostly how Mises credit theory affected the time market, investment demand, and production processes. But they're necessarily linked.

    Name these "dozen places [in Human Action] where this is so".

    Talk is cheap.


    You're right; I'm totally lying. I'm actually not an Austrian and I just pretend. Is this demand serious??

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  8. The unique natural rate of interest in a growing economy is an inoperable, invalid concept, rendering ABCT total garbage.

    I don't even know what you're talking about.

    There's such a thing as a natural rate of interest, is that what you meant? And if you deny this, then you hold the honor of being the only person in the world to agree with Keynes on a purely liquidity preference theory of the interest rate. Denying real explanations of interest is denying time preference.

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  9. "And if you deny this, then you hold the honor of being the only person in the world to agree with Keynes on a purely liquidity preference theory of the interest rate. Denying real explanations of interest is denying time preference"

    Keynes' liquidity preference theory of the interest rate isn't held by modern Post Keynesians: the monetary rates are set exogenously by the central bank.

    I don't even know what you're talking about.

    Evidently the Hayek-Sraffa debate is not something you've bothered to read about.

    The natural rate is pure myth.

    And Mises's originary rate is just another real interest rate theory, as unworkable as the Wicksellian natural rate. For refutation of Mises's "originary rate" and time preference as some kind of a priori category:

    Fiona Cameron Maclachlan, Keynes' general theory of interest: a reconsideration, p. 48ff.

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  10. Mattheus and "Lord Keynes",

    Mattheus, Hayek was not the first to lay out how monetary policy changes the rate of interest, the time-structure of production and the profits of businesses. This is all in "The Theory of Money and Credit". Hayek's version is in some ways more sophisticated, even in his early books, he doesn't rely on the average period of production as Mises does. Hayek's later versions of the theory are more sophisticated.

    Mises certainly gave a theory which I like to call "Little ABCT" where he simply explains the Cantillon effect and how it changes relative prices. He then points out that this distorts the market process. This is all very subjectivist and simple. But, in other parts he gives the "Big ABCT" theory, complete with it's changes in the money rate of interest, average period of production and so on.

    Some of LK's criticisms of Hayek are certainly right and Hayek changed his position because of them. However, I don't think they refute his ideas about the cause of recessions. The question of recovery from recessions is more murky. I'd have to write a whole paper on this to explain, which one day I will.

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  11. Keynes' liquidity preference theory of the interest rate isn't held by modern Post Keynesians: the monetary rates are set exogenously by the central bank.

    Well duh. I'm aware the central bank sets the interest rate. What you're disputing is the real nature of interest - which makes your position a purely monetary position like what Keynes held. This doctrine is untenable.

    The natural rate is pure myth.

    And Mises's originary rate is just another real interest rate theory, as unworkable as the Wicksellian natural rate.


    You don't know what you're talking about. Time preference is an a priori phenomena of action. It is irrefutable. Originary interest is a deduction from the basic fact of time preference. They are unassailable (although Daniel might argue incomplete).

    I don't suppose you've read the relevant literature on time preference or originary interest, have you? I don't suppose you've read the relevant chapters in Human Action or Man, Economy, and State have you?

    Why don't you explain what you think Mises argues?

    I always love hearing Keynesians talk about Mises and Hayek. It's like hearing a high school science teacher explain Einstein to his students.

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  12. The pure time preference theory of interest is NOT even accepted by all Austrians and the quite convincing arguments that can made against it are well known:

    http://mises.org/journals/scholar/murphy2.pdf

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  13. And even the status of time preference is disputed:

    "For Bohm-Bawerk time preference is an empirical regularity observed through casual psychological observation. Instead, Mises saw time preference as a 'definite categorial element ... operative in every instance of action'."

    Israel M. Kirzner (ed.), Essays on Capital and Interest: An Austrian Perspective, p. 126.

    Don't pretend that time preference conceived as an "a priori phenomena of action" is some kind of undisputed idea, held by ALL Austrians. It's not: they are divided on the issue, for good reasons.

    As usual, this is an instance of Mises pushing his praxeological theology to absurd extremes.

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  14. Scholars, including some partisans of the Austrian school, recognize that many perceive Sraffa as having bested Hayek. This defeat lowered the prestige of Austrian Business Cycle Theory. If you want to defend ABCT, eventually you have to address that perception. Claiming that nobody but true believers understands the incoherent mysticism that fanboys excrete is hardly persuasive.

    I do have some differences with LK. In refuting the Austrian fanboy's idea of time preference as an a priori category, I'm more likely to point to the experimental evidence on hyperbolic discounting. It's always fun when the world does not accord with what some confusedly think they can derive from pure logic.

    I think the "natural rate" of interest might be as well-defined along a Harrodian warranted growth path as in an ERE. That's a kind of growing economy. But once you have an economy in which different sectors expand at different rates, tastes change over time, and entrepreneurs plan on altering the level of production, the natural rate of interest is not well-defined. Once Hayek accepted Sraffa's point, his policy maxim of keeping the market rate equal to the natural rate was incoherent.

    (The natural rate is not even unique in the ERE, but, in that case, it does not vary among commodities. This sort non-uniqueness is not Sraffa's point.)

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  15. Mattheus and "Lord Keynes",

    LK is right that the pure time-preference theory of interest isn't held by all Austrian economists. Hayek didn't hold it, for example, neither did Bohm-Bawerk, he modified his interest theory in "The Positive Theory of Capital". I don't believe it either. The flaw in the theory is that when entrepreneurs have many potential business opportunities they will bid up the price of capital. The time-preference theory asks us to suppose of a situation where these opportunities have been exhausted or are very few. This means that even though the community of capital owners may be willing to receive X% for their capital they will receive more. If you think about it, it's a marginalist situation. Different capital owners have different time-preference and hence interest rate demands, and the different capital demanders have different tolerance for interest rates too. In a final equilibrium - in an evenly-rotating economy - there are no new opportunities, so in that case the interest rate is determined only by time-preference. If you read Mises carefully you will see that he only deals with this case, he doesn't deal with real progressing economies. He says something to the effect that the complications are too great. Rothbard is different, he says that the time-preference theory applies always. It is Rothbard who pushes the theory to absurd extremes. Both of them don't treat inter-temporal substitution as well as they should.

    The difference between Bohm-Bawerk and Mises view is that they see time-preference as a slightly different thing. The question Bohm-Bawerk (and Fisher) asks is "Why should a person prefer more satisfaction in one earlier time period than in a later time period". That is a psychological question, but as Garrison points out this sneaks in a "equal baselines". That is, it's assumed that the natural thing to do would be to prefer the same amount of consumption. Mises on the other hand questions this. Instead of assuming an equal baseline he asks a different questions. He asks "why should we ever consume in the present time period? Why not save everything for the future?". His reply to this is basically: because we all die, and we all wish to exert our human will before doing so. You can argue whether that's philosophically valid, but it's much more reasonable than LK makes it out to be.

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  16. Just to go back to this "liquidity preference" thing...

    The only thing that Rothbardians and Keynesians seem to agree on is that holding money isn't saving. Well, why isn't it saving? I think it's saving since its putting something aside for the future, even if the near future.

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  17. "The only thing that Rothbardians and Keynesians seem to agree on is that holding money isn't saving. Well, why isn't it saving?

    Because saving in the convention sense means money saved then lent out for capital goods investment.

    No capital goods investment = no saving.

    Money just held for the future due to the precautionary motive is idle money, which - if it has been earned from factor payments from this year's production - subtracts from aggregate demand in that year. If this is done on a large enough scale Say's law does not work, and you have a failure of aggregate demand.

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  18. LK,

    Suppose that everyone were to save an extra £1 from their weekly income, by keeping that extra £1 as a bank account balance. Now, suppose that there is no expansion in the quantity of money. In that case the purchasing power of money will rise. However, this depends on banking institutions. If we have a more flexible banking system then the extra supply of savings into it will result in a supply of new loans to businesses.

    So, whether holding a greater money stock doesn't lead to a greater supply of funds for loans is institutionally determined.

    I agree with you that "failures in aggregate demand" of they type you describe can occur. Whether this is a refutation of Say's law depends on what you think Say's law is.

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  19. "In that case the purchasing power of money will rise"

    It will not necessarily rise (through deflation) in the real world.

    We don't live in a world of perfectly flexible prices or even significantly and rapdily flexible prices and wages. Real world rigidities impair these perfectly adjusting market processes imagined by Austrians/Walrasians/monetarists etc.

    If we have a more flexible banking system then the extra supply of savings into it will result in a supply of new loans to businesses.

    You are clearly thinking of loanble funds and some equilibrium interest rate and equates investment demand with supply: it doesn't happen in the real world.
    Investment is unstable and subject to fluctuating short and long term subjective expectations.

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  20. > We don't live in a world of perfectly
    > flexible prices or even significantly and rapdily
    > flexible prices and wages. Real world rigidities
    > impair these perfectly adjusting market processes
    > imagined by Austrians/Walrasians/monetarists etc.

    I agree. Like Steve Horwitz, the free-bankers and the other Monetary disequilibrium folks I don't think deflation is costless. When a rise in demand for money occurs sticky prices cause output and prices to both fall in some combination. So, if that happens output is foregone. So, it is better not to have deflation of this sort, but rather to have "flexible" monetary institutions that will create more money when the demand for it rises.

    My main point here was to challenge the view of those Keynesians who think that sticky prices are not necessary to reach Keynesian policy conclusions. Those who think that liquidity preference concerns suffice. If we have the monetary flexibility I describe then holding money supports loans, and is therefore saving. Now, whether that act of saving leads directly to purchase of investment goods in the current year is a different question.

    What you are saying only works in a Rothbardian, or fixed M, world with no monetary flexibility. In central banking systems or indeed free fractional-reserve banking systems (which are the only systems that have existed in practice in modern times) it doesn't apply.

    > You are clearly thinking of loanble funds and
    > some equilibrium interest rate and equates
    > investment demand with supply: it doesn't happen in
    > the real world.
    > Investment is unstable and subject to fluctuating
    > short and long term subjective expectations.

    I am thinking of a loanable funds market. No market equilibriate perfectly, all are subject to fluctuating short-term and long-term expectations. I don't deny this either. The "natural rate of interest" is an abstraction, like a price in a model made up of several short-term equilibrium states. In this way it's not a very "Austrian" concept. However, this doesn't directly mean that there is something wrong with this market. The important question is, whether there is anything unusual about it that leads to systematic economic problems.

    Since all markets aren't in equilibrium and all are subject to changing subjective expectations, the question is why must we privilege one particular market as flawed? What is special about this market?

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  21. LK,

    I've written a long reply that's been killed by Daniel's spambot. It may reappear when Daniel has a look at his spam directory.

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  22. "In refuting the Austrian fanboy's idea of time preference as an a priori category, I'm more likely to point to the experimental evidence on hyperbolic discounting."

    Could you say more about this?

    "In behavioral economics, hyperbolic discounting is a time-inconsistent model of discounting. Given two similar rewards, humans show a preference for one that arrives sooner rather than later. Humans are said to discount the value of the later reward, by a factor that increases with the length of the delay."

    http://en.wikipedia.org/wiki/Hyperbolic_discounting

    How does this conflict with Mises' theory of time preference? Does he always require a time-consistent model of discounting?

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  23. LK,

    It is not clear for me here. Is it completely rejected among Keynsians that there is time preference at all, or only that it is not the sole reason for a positive interest rate, and only a component of it? Is in Fiona Maclachlans book a complete exposition of the Keynsian theory of interest? And is it shared among all Keynsians (except post Keynsians)? (I guess there is no free version available, right?)

    @ Current,

    "Some of LK's criticisms of Hayek are certainly right and Hayek changed his position because of them."

    Do I find this in Hayeks Pure Theory of Capital?

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  24. KeynEsian of course... Sorry!

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  25. The pure time preference theory of interest is NOT even accepted by all Austrians and the quite convincing arguments that can made against it are well known:

    Another case of you misunderstanding the argument.

    I don't know of anyone that suggests that the market rate of interest is determined SOLELY by time preference - I certainly don't. What Austrians assert is that the market rate of interest is determined originally by time preference (in an ERE, general equilibrium) and is joined by certain discounts, like entrepreneurial risk (in a dynamic economy). No one is suggesting that our real life interest rate is solely and only determined by time preference. Even Mises didn't argue that. It's rather the beginning of it. Originary interest is a necessary phenomena of action, but it is not the only effect exerted on the market rate of interest.

    Don't pretend that time preference conceived as an "a priori phenomena of action" is some kind of undisputed idea, held by ALL Austrians. It's not: they are divided on the issue, for good reasons.

    All modern Austrians then. Bohm Bawerk happened to be wrong on this case. Time preference is not an empirical event; it's a necessary phenomena in all acting. You and I display time preference in every action, and it manifests socially as originary interest.

    In refuting the Austrian fanboy's idea of time preference as an a priori category, I'm more likely to point to the experimental evidence on hyperbolic discounting

    You really don't understand time preference, do you? It's irrefutable. All action takes place in time, and all actors choose when to act. Time preference (the choice of acting now vs. later) is always present.

    The only thing that Rothbardians and Keynesians seem to agree on is that holding money isn't saving. Well, why isn't it saving? I think it's saving since its putting something aside for the future, even if the near future.

    It is saving, but it's not providing loanable funds. People generally use the words interchangeably but held money is an example where the distinction is important. Held money is saved money (simply because those resources haven't been consumed) but it's not an increase in savings as generally defined; i.e., an increase in loanable funds, elongation of the structure of production, etc.

    If this is done on a large enough scale Say's law does not work, and you have a failure of aggregate demand.

    Because you hold this sophomoric idea that demand is only demand-for-goods. Holding idle money definitely fulfills a demand. Just not the kind of demand you can show in a balance sheet. Say's Law remains valid.

    Does he always require a time-consistent model of discounting?

    Mises doesn't model time preference. It's not an empirical event. It's a deduction of action. Given a choice between the same amount of utility now vs. later, the actor will always prefer the former. The opposite answer results in contradiction.

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  26. Income - consumption = saving.

    Spending income on increased money balances defers consumption. Therefore, increased money balances is increased savings.

    Not all saving is investment. If I buy a can of soup on Sunday, then I may save it until Friday. If someone wanted to consume my soup on Monday, and promised to return the soup (plus some little thing extra) on Friday when I planned to consume it, that would be investment. There is a difference between saving and investment. One is the intentional release of goods to produce future goods and services, while the other is the putting aside of goods for later consumption. Both involve time preference.

    But money is peculiar. Money is not put aside for later consumption, because money is not a consumer good. Neither does withdrawing money from circulation just put aside cans of soup for later consumption, it puts aside consumer and capital goods, including human capital. It sends the false signal of a general fall in demand, rather than a fall in demand for present goods and an increase in demand for future goods.

    One of the few redeeming features of the present system is that even base money is a liability of the Federal Reserve, so all increases in money demand really are in increase in demand for future goods. If we had a redeemable commodity base, then this would might not be so. If people increased their demand for gold coins, for example, then this would not be for saving but not investing.

    Fortunately, I think, as a general rule, in a competitive market for money, the good (or perhaps basket of goods) that is most preferred as a monetary base is one that prevents changes in its value due to fluctuations in money demand. In other words, good money tends to link all saving with investment and vice versa; that's one of the reasons that inside money creased by fractional reserve banks tends to be relatively successful -- it establishes a closer relationship between saving and investment.

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  27. I mostly agree with Lee Kelly. I said something similar in the message that disappeared.

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  28. I wouldn't really recommend reading "The Pure Theory of Capital". It's confusing, Hayek himself didn't like it. Horwitz has written about this, though I haven't read that. Garrison has written about the reswitching part of it too.

    As far as I know, there is really no central place you can find a reply. This is how I understand things though....

    Sraffa pointed out that Hayek bases his understanding of interest on Wicksell. Wicksell uses the idea of interest in a barter economy, this is false because interest as we know it couldn't arise without money. So, Wicksell is assuming money prices without the existence of money. Secondly, there is the "reswitching" issue. This is the idea that under certain circumstances roundaboutness may not be related to the interest rate (this issue was first brought up by Hayek himself but Samuelson's treatment of it is what sparked the debate).

    The problems of Wicksell's interest rate theory can be mostly solved through using a theory that's explicitly based on a money economy. Hayek chose to use Fisher's productivity theory. When he wrote "The Pure Theory of Capital" he thought that productivity dominated over time-preference. Later on he modified his views in a paper called "Time-Preference and Productivity: A Reconsideration", where he gives time-preference the role of a sort of floor that comes into importance as the importance of productivity falls. Anyway, the point is that Fisher's theory doesn't depend on appeal to barter arguments.

    The problem with reswitching is simply that it isn't relevant in the real world at real interest rates. Garrison wrote a paper on this which you can find on his site by searching the web.

    Part of the problem here, as Lee Kelly mentions, is that a "savings-investment" theory of interest covers many sins. In Cambridge neoclassical theories the savings-investment theory directly relates the GDP flows to each other. Lee describes the problem with those well above. The Austrian theory isn't the same (at least not as I understand it). The broad capital market is seen as determining the interest rate. That means that flows into it are not necessarily as important as what is happening with existing capital and existing credit contracts, and how they are subjectively priced. The loan market is connected to the stock market and other capital markets by substitution. This is actually not a million miles from the Keynesian view.

    We don't agree with the Keynesian view though... The theoretical idea about bonds and money becoming equivalent is very dubious. And, holding money most certainly is saving. Distance from monetary equilibrium can make it wasted saving, but that's a different issue.

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  29. I lost a big post to Dan's spam killing machine.

    I elaborate a bit on the difference between savings and investment and why this generates confusion for the Keynesian position.

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  30. Current,

    Can you link me to some resources which expound on your point of view?

    I had also earlier come across your response to "Mr Krugman and the Moderns" at Coordination Problem. It would be great if you could direct me to some resources related to your post there - on the quantity theory of money and GDP.

    John

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  31. Daniel's spam killer just killed another big post of mine too. Hopefully Daniel can fix that soon.

    To Anonymous.... As I said over on Coordination problem, Anthony Evans and I have a paper in the works. That paper deals with the quantity-theory-of-money side of things. We'll put it up a draft for comment on an open access part of the internet, then submit it to a journal. I hope to write one on the savings-investment side of things soon too.

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  32. I just fixed the spam for this post, I think. There were other comments from other threads that the spam filter got, but I'm going to leave those for Daniel to look into... I don't follow things very closely around here, and I know he deleted some comments he didn't approve of a little while ago, so I'll leave it to him to save other legit comments from the spam trash can rather than risk re-posting things that he wanted off the comment thread.

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  33. Evan, thanks for fixing that.

    Mattheus,

    > It is saving, but it's not providing loanable funds.
    > People generally use the words interchangeably but
    > held money is an example where the distinction is
    > important. Held money is saved money (simply because
    > those resources haven't been consumed) but it's not
    > an increase in savings as generally defined; i.e.,
    > an increase in loanable funds, elongation of the
    > structure of production, etc.

    If you put it like that I agree. Whether or not it provides loanable funds depends on monetary institutions.

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  34. In models of hyperbolic discounting, as I understand it, agents can contract now to make decisions trading off goods delivered later and even later than that. And then they would systematically want to make different decisions if it was later. I suppose a Mises fanboy could say that agent's tastes need not stay unchanged. But, with this epicycle, one might question how systematic regularities in capitalist economies can be derived from subjectivism.

    Of course, Mattheus, not knowing what he is talking about, cannot address the issue. He did not even read the Robert Murphy paper "Lord Keynes" links to - at least, he did not read it with any understanding.

    "Current" obviously doesn't understand the Hayek-Sraffa debate. Many own-rates of interest can arise in both barter economies and economies with money. (In unpublished updates to my critique of ABCT, I insert a line in my exposition of ABCT saying, "In an economy with 'neutral money', the interest rate would tend towards the natural rate and resources would tend towards the allocation in the ideal barter economy.")

    Hayek's equilibrium concept in Prices and Production is something like Mises' Evenly Rotating Economy. In The Pure Theory of Capital, it is, as I understand it, something like the Arrow-Debreu model of intertemporal equilibrium. I don't think a version of ABCT can be formulated with the latter concept, where agents (correctly) need not expect relative equilibrium spot prices to stay constant through time. I'm not surprised "Current" does not go into these developments in Austrian-school economics.

    Samuelson's treatment of reswitching is not "what sparked the debate". Both Joan Robinson and Sraffa have classic and frequently referenced earlier works in the debate.

    Garrison, in his paper on reswitching, shows how to construct a reswitching example with any pair of interest rates you care to name. So this is a non sequitur: "reswitching ... simply ... isn't relevant in the real world at real interest rates." As I show in my critique of ABCT, Garrison is also ignorant of the literature on empirical arguments showing real-world instances of reswitching and capital-reversing. Sraffa put aside arguments over reswitching and capital-reversing in his debate with Hayek anyways.

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  35. Robert Vienneau,

    I've discussed this subject before with you. As before your answers I very good, but go beyond my understanding of the subject and especially the history of the subject. I'm in the process of writing something about interest rate (though not about this part of the subject). I hope to move on to thinking more about this after that.

    I've read earlier versions of you paper criticising ABCT. Good luck with publishing it, though I generally agree with ABCT, I think it would be a useful addition to the literature.

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