Thursday, June 7, 2012

More on Austrians and Keynes with some of my reactions

This is one of those comment sections that I blog for. I'll take responsibility for the recent lack of such comment sections, since the last month has been insane for me and I haven't posted very substantive stuff.

Let's work through some of this stuff.

1. Mises and Expectations

Current shared a really great quote from Mises in "The Cause of Economic Crises" that needs to be posted:

" expansion is tied in with certain anticipations. If the entrepreneurs expect low interest rates to continue, they will use the low interest rates as a basis for their computations. Only then will entrepreneurs allow themselves to be tempted, by the offer of more ample and cheaper credit, to consider business enterprises which would not appear profitable at the higher interest rates that would prevail on the unaltered loan market.

If it is publicly proclaimed that care will be taken to stop the creation of additional credit in time, then the hoped-for gains must fail to appear. No entrepreneur will want to embark on a new business if it is clear to him in advance that the business cannot be carried through to completion successfully. The failure of recent pump-priming attempts and statements of the authorities responsible for banking policy make it evident that the time of cheap money will very soon come to an end. If there is talk of restriction in the future, one cannot continue to 'prime the pump' with credit expansion."
- "The Cause of Economic Crises" p.188.

He mentioned it in the context of a criticism of Keynes. I don't entirely see it that way probably because I don't think Keynes is guilty of some of the things Austrians suggest he is. But the other thing Current noted about the passage (that I like too) is how it dealt with expectations. The second paragraph is particularly good. It was written in the 1930s, but if you didn't have that context you could have sworn it was written in the 1980s or 1990s in the height of discussions about commitment and expectations in monetary policy. People in the past are not as naive as we usually think they are. I made this same point a couple weeks back in discussing a quote from Keynes where he talks about consumption decisions being made on the basis of expectations for future streams of income and consumption - another New Keynesian, forward-looking rational expectations analysis (in other words, NOT the consumption function your professors attributed to Keynes). Great stuff.

2. The Natural Rate of Interest

Unlearningecon is also skeptical of the Austrian reliance on the natural rate to draw business cycle conclusions, despite all the problems with the concept, and Gene mentions Bob Murphy's dissertation that shares these criticisms of the natural rate. I've linked to it before, but here it is again. I've never been too concerned about this. Even if there isn't a single natural rate, it still seems like the various interest rates out there are compared to whatever "natural rate" might be relevant in a particular situation, and the same dynamics (Keynesian, Austrian, or otherwise) would still apply. That there is not a single natural rate doesn't seem to me to change the fundamental points, but people can correct me if I'm wrong on that.

3. And then there was Hazlitt...

I had claimed that I don't think there's really a decent critique of Keynes by Austrians, and Kaj brings up the perennial suggestion of Hazlitt. I have not read Hazlitt in its entirety but I have read chunks of it and have read and discussed his section on liquidity preference particularly closely. I did not think it was very good, but would have to reread it to remember my specific concerns. I hear this suggestion a lot. I don't have plans to read him because I haven't been impressed with what I have read, but if you have specific sections you think are worthwhile reading, please share them with me. It's not just me being cranky, either. The fact is, Henry Hazlitt is widely considered to have a weak grasp of Keynes. I find it interesting that people are so attracted to him... I think its just that they like to have a "point by point refutation" to cite. It's nice to have something comprehensive you can just point to. And Hazlitt is certainly comprehensive. The question is, is he good? Gene has this to share on Hazlitt:

"I told a leading Austrian macroeconomist that I wanted to understand Keynes, and so I was planning on reading Hazlitt. He said, "Oooh, no, I wouldn't bother: Hazlitt doesn't really get Keynes.""

I get this impression from a lot of people, and this was also my impression from the handful of sections I read.

Some people do like him. Peter Boettke recently shared a paper on him. I don't see the appeal. I know this is a vague criticism, but I didn't prepare for a post on Hazlitt. And anyway, the advocacy of Hazlitt is usually pretty vague too, is it not?

If you want to understand Keynesian economics pick up a textbook. If you want to understand "the economics of Keynes", I always suggest reading Lawrence Klein's The Keynesian Revolution. It's quite good, and that's when a lot of things "clicked" for me about what was unique in what Keynes was saying and particularly what he cared a lot about that may have been downplayed in subsequent syntheses. And of course read Keynes himself. A lot of people think he's hard to get... I've never really thought so, but that's obviously a good thing to go for if you want. I also like Meltzer's (1983) JEL article for understanding "the economics of Keynes". I have not read his book on the same subject, but I imagine it makes similar points.


  1. Regarding Henry Hazlitt's critique of the General Theory, there's one slight problem with it: you need to understand calculus at the lower division level to understand the technical exposition. According to this review, Hazlitt fails to understand Keynes's technical exposition in Chapters 19, 20, and 21.

    1. Keynes himself specified his mathematical "demonstration" was somewhat superfluous: "Those who (rightly) dislike algebra will lose little by omitting the first section of this chapter" [chapter 20].

    2. Read Robert Vienneau's review of Hazlitt - he mentioned it in Daniel Kuehn's previous post. Hazlitt did not even understand the marginal productivity theory of wages, let alone the more advanced echelons of probability theory and calculus.

    3. I think Hazlitt understood correctly the “marginal productivity theory of wages” (even if there’s a little flaw of formulation in his text), but indeed, as I have mentioned in one of my previous comments, I think he erred regarding the disutility theory.

      And I believe Robert Vienneau is wrong as well. Indeed, he writes, “Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment.” My opinion is that the marginal productivity of labor is enough for determining the wage rates. The disutility has an impact on the wages rates, as any cost of production has, but only in an indirect way: it regulates the volume of employment, which, in turn, has an impact on the marginal productivity of labor, and, eventually, on the wage rates. So the disutility of labor is not an independent factor determining the wages; it works through the marginal productivity.

      Conversely, Keynes doesn’t seem to understand the marginal theory. More exactly, He accepts it for the determination of wages rates, but not for the determination of the other prices. Thus, he wrote: “For it is far from being consistent with the general tenor of the classical theory, which has taught us to believe that prices are governed by marginal prime cost in terms of money and that money-wages largely govern marginal prime cost. Thus if money-wages change, one would have expected the classical school to argue that prices would change in almost the same proportion, leaving the real wage and the level of unemployment practically the same as before, any small gain or loss to labour being at the expense or profit of other elements of marginal cost which have been left unaltered.” And in a footnote: “This argument would, indeed, contain, to my thinking, a large element of truth, though the complete results of a change in money-wages are more complex, as we shall show in Chapter 19 below.” It really looks like a costs-theory of prices. That’s not very consistent with the marginal theory.

      Moreover, even if it were true that Hazlitt "did not even understand the marginal productivity theory of wages", it doesn't demonstrate that he was as well unable to grasp "advanced echelons of probability theory and calculus".

      Similarly, an alleged error in the first chapter can't invalidate an entire book. Such a reasoning doesn't respect a serious standard of intellectual proof. At any rate, it was not Hazlitt's standard. He found grave errors in the first chapter of the GT, and, nevertheless, he engaged in a serious chapter by chapter analysis of this book.

    4. Unlearning,
      "I haven't read it fully so I won't engage you completely".

      That's great. It sounds like "I never read Hazlitt but someone else wrote a review of Hazlitt, so Hazlitt su***." How can we take you seriously after that ? Also, Vienneau never reviewed the whole book (just a few paragraphs of the 450 pages book) ... but he comes to the conclusion that the "whole" book is utter garbage. Yes, the WHOLE book. Can one respect Vienneau ? No. The same is true of you, Unlearning.
      Finally, Raoul and I already talked about his article here.

      I add a quick comment. When Raoul says that Vienneau is wrong in writing “Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment.” that's because the second postulate ("The utility of the wage when a given volume of labor is employed is equal to the marginal disutility of that amount of employment") is already included in the first postulate ("The wage is equal to the marginal product of labor").

      And ... great posts, as always, Raoul.

    5. I did not do a review, but I also did not come to my conclusion on the basis of just a few paragraphs. Why do you lie like that?

      I'd be amused by defense of Raoul's opinion by somebody who understands what a mathematical function is.

    6. "Why do you lie like that?"

      I'm not lying. I'll refresh your memory.

      "As far as I am concerned, Hazlitt’s entire book attacking Keynes is as incompetent as the above."

    7. That does not say that I came to my conclusions on the the basis of those few paragraphs. Again, it is rude of you to lie.

      Thanks for pointing out some french for me to stagger through. I am not comfortable in the language of my ancestors.

    8. One more thing.

      When you wrote "Hazlitt’s entire book attacking Keynes is as incompetent as the above. It might take me some time to further document this claim" I was wondering ... what "claim" ? Probably the claim that "Hazlitt’s entire book attacking Keynes is as incompetent as the above". So I suspect that at the time you wrote this article, you never read the entire book.

      The problem is, when you wrote "Hazlitt’s entire book attacking Keynes is as incompetent as the above" the reader can easily interpret this sentence as a full review. See Unlearning's comment, for instance :

      "Hazlitt? LOL. Robert Vienneau takes him to task for not understanding anything here"

      But Unlearning replied to Ned Netterville, who talked about keynes's misinterpretation of Say's law. Your article has nothing to do with that, but it is cited by Unlearning as a refutation of Hazlitt's book. It sounds like "If Hazlitt is wrong about 'a', he is wrong about 'b', 'c', 'd', 'e', and so on...". I would like to say "splendide de bêtise".

      Your article cannot be considered as a criticism of Hazlitt's book. It was not useful to add "Hazlitt’s entire book attacking Keynes is as incompetent as the above" if you were not attacking the entire book; a reader can easily believe that the entire book is utter garbage just on the basis of what you said in your article.

      I never read any criticism/rebuttal of Hazlitt's book (I mean... a critic of the entire book).

    9. "It sounds like..." "So I suspect..." "It sounds like" I doubt anybody cares about your feelings.

      But I was and do attack Hazlitt's entire book, albeit I neither clarify the subject of the book nor give examples from more than one chapter.

    10. Should be, "But I was and am attacking..."

  2. Hello,

    I really like The Failure of the New Economics, and, nevertheless, I share some of your critiques.

    Hazlitt’s book is clearly not an “Austrian” analysis of Keynes. Indeed, the author doesn’t really base his critical work on specific Austrian theories (except, maybe, the hostility toward the mathematical and aggregative methods). Moreover, Hazlitt doesn’t agree with two important Austrian tenets, namely the pure time preference theory and the relation between prices and costs. I also believe he doesn’t grasp correctly the concept of disutility of labor and the law of Say.

    I guess that one of the main goals of Hazlitt was to criticize Keynes on the basis of some very widely agreed upon principles of economics: the importance of savings, the problem with too high wages rates, the inability of government official to make sound investments decisions, the peril of the easy money policy.

    Besides, Hazlitt emphasized what he thought to be the basic flaws of the General Theory:

    1° the “intellectual dishonesty” of Keynes (for instance, the misrepresentation of Say’s law and of the orthodox critics against too high wages and too low interest rates),

    2° the lack of consistency of some important concepts (the liquidity preference, the demand function, the propensity to consume, the multiplier),

    3° the fallacy of the aggregative method,

    4° the general lack of seriousness of the GT (in particular, the so recurrent shifting definitions),

    5° the authoritarian trend of Keynes,

    6° the “full employment” fallacy,

    7° the utopian feature of the last chapters of the GT (the praise of the Gesell theory of stamped money, the abolition of the scarcity of the capital before 25 years…).

    8° the lack of originality of the book (for instance, on the role of expectations or on the critique of the crude quantitative theory).

    Of course, The Failure is mainly a work of journalist. It is a matter-of-facts book. It doesn’t include any original idea. (Except, perhaps, the critiques against the “multiplier” and the “GDP” concepts). It’s like a (very critical) study guide. A lot of people would have been able to write it. Nevertheless, this matter-of-facts book demolishes thoroughly the GT, and one may regret that it was not written before. As Rothbard put it in the foreword: “This, then, was the critical betrayal of the intellectuals: that Henry Hazlitt's magnificent The Failure of the "New Economics" was not written twenty years ago by one of those "Austrian" economists — by a Lionel Robbins or a Gottfried von Haberler. If this had been done, the whole history of our time would have been different.”

    1. I haven't read it fully so I won't engage you completely, instead sniping from the sidelines.

      Firstly: slapping the word 'fallacy' onto something doesn't make it a fallacy. This was a tactic used by Hazlitt and Rothbard and I see it all too often.

      1 - Keynes may have stated Say's Law incorrectly for some but that doesn't make him 'intellectually dishonest.' Furthermore, I get the impression that some of the more reasonable Austrians have concede that although it wasn't stated properly, it didn't impact his analysis.

      5 is ridiculous, Keynes was simply not an authoritarian.

      7 - criticising someone for being 'utopian' is not an argument. Any society that approximates the bets we can manage is, by definition, utopian. If you object to that then, well, I don't know.

      8 has nothing to do with economics.

    2. Daniel,

      Every time I read one of these posts I am left to ask: Why is it so important to this person that Keynes be so wrong? What about them and their belief system is so out of wack with reality?

      Keynes, simply put, wrote three things which are absolutely true.

      First, implicitly (Soros and Munger say it better) financial markets are irrational and unstable. I prefer the obvious statement that no one knows the value of a home mortgage in 30 years, I mean no one. No one even knows its value this afternoon.

      Second, as financial markets become bigger, faster paced, etc., they would tend to become more irrational and unstable.

      Third, when a big financial market becomes deflationary, it will not self-correct.

      Government (what I would call enforceable collective action) is not the preferred solution, it is to only available choice.

      What is so hard about accepting these realities?

      BTW, wages can never be too high, if supply creates its own demand

    3. Unlearning,
      "Keynes may have stated Say's Law incorrectly for some but that doesn't make him 'intellectually dishonest.'..."

      I wonder.

      "One striking illustration of Maynard Keynes’s unjus tified arrogance and intellectual irresponsibility was his reaction to Ludwig von Mises’s brilliant and pioneering Treatise on Money and Credit, published in German in 1912. Keynes had recently been made the editor of Britain’s leading scholarly economic periodical, Cambridge University’s Economic Journal. He reviewed Mises’s book, giving it short shrift. The book, he wrote condescendingly, had “considerable merit” and was “enlightened,” and its author was definitely “widely read,” but Keynes expressed his disappointment that the book was neither “construc tive” nor “original” (Keynes 1914). This brusque reaction managed to kill any interest in Mises’s book in Great Britain, and Money and Credit remained untranslated for two fateful decades. The peculiar point about Keynes’s review is that Mises’s book was highly constructive and systematic, as well as remarkably original. How could Keynes not have seen that? This puzzle was cleared up a decade and a half later, when, in a footnote to his own Treatise on Money, Keynes impishly admitted that “in German, I can only clearly understand what I already know—so that new ideas are apt to be veiled from me by the difficulties of the language” (Keynes 1930a: I, 199 n.2). Such unmitigated gall. This was Keynes to the hilt: to review a book in a language where he was incapable of grasping new ideas, and then to attack that book for not containing anything new, is the height of arrogance and irresponsibility. 4" (p. 11-12)

    4. Wow this is like a parade of bad Austrian arguments against Keynes.

      Keynes had a sense of humour. He obviously made the 'only understand what I know already' jokes in jest - it is quite a British comment. His review of Mises was never intended to be comprehensive and was only short.

      Why you'd appeal to somebody who wrote an entire book that is effectively an ad hominem is beyond me.

  3. Raoul: True, Keynes was an "idea man" who wanted his message to get out there instead of being solidly cast in one technical form. But if you follow the "tedious algebra" (which is actually differential and integral calculus), you will find that Keynes's mathematical model was state of the art for its time - it's a multiple equilibria model that proves the special case of full employment and the existence of unemployment equilibria.

    1. That doesn’t weaken my point. To point out the alleged mathematical illiteracy of Hazlitt in order to put discredit on his critique of the GT is useless since Keynes admitted the understanding of his equations was not necessary.

      And I don't think Keynes really wanted "his message to get out there instead of being solidly cast in one technical form." Indeed, if he was, he wouldn't have use so new and ununderstandable vocabulary. It seems like if he loved to put gratuitous complexity.

      Just look at his definition of the unvoluntary unemployment:

      "My definition is, therefore, as follows: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment."

      Do you really think Keynes wanted to be understood?

    2. That doesn’t weaken my point. To point out the alleged mathematical illiteracy of Hazlitt in order to put discredit on his critique of the GT is useless since Keynes admitted the understanding of his equations was not necessary.

    3. Raoul,
      "Do you really think Keynes wanted to be understood?"

      No, that's the goal. You already know that, mon ami.

      "In addition to ‘frictional’ unemployment, the postulate is also compatible with ‘voluntary’ unemployment due to the refusal or inability of a unit of labour, as a result of legislation or social practices or of combination for collective bargaining or of slow response to change or of mere human obstinacy, to accept a reward corresponding to the value of the product attributable to its marginal productivity." (chapter 2, General Theory)

      voluntary = legislation. Seriously ... ?

  4. Daniel offers that "People in the past are not as naive as we usually think they are."

    Daniel, your arrogance and sense of self importance is too much. You couldn't carry the plans and spec bag for the men who conceived of, planned, financed, and managed the building of the Great Pyramid.

    1. Arrogance and self importance?!?!?

      You are making my point Anonymous. I'm criticizing people who think this. I'm agreeing with you.

    2. That having been said, I think I'm at least up to the task of carrying their plans and spec bag.

      I could probably teach them a thing or two about hygiene, higher math, and human rights too. But I do agree with your broader point.

    3. "conceived of, planned, financed, and managed the building of the Great Pyramid."

      Hmm. There's a strange sense of humour around here, and sometimes I see jokes I'm not sure are there. Like here.

    4. HA! That never even crossed my mind Current. That's good. If it was not intended, it should have been.

  5. Unlearningecon,

    You wrote:

    “Firstly: slapping the word 'fallacy' onto something doesn't make it a fallacy. This was a tactic used by Hazlitt and Rothbard and I see it all too often.”

    I don’t remind where Hazlitt would have alleged the existence of a fallacy without bringing about a demonstration. Moreover, here, obviously, my comment was not intended to explain why the quoted ideas were fallacies; its only purpose was to point out what Hazlitt wrote in the examined book.

    “Keynes may have stated Say's Law incorrectly for some but that doesn't make him 'intellectually dishonest.”

    To misstate an adverse theory doesn’t necessarily make you “intellectually dishonest”, of course. It depends upon the circumstances of the case, and, in particular, upon the intensity of the misstatement, the complexity of the reasoning misstated, and the efforts made for understanding it (for instance, to quote the words of the adversary).

    1/ The intensity of the misstatement and the complexity of the opinion misstated. Say’s law is: the supply of A creates (or, makes possible) the demand for B. It’s very easy to understand. But, according to Keynes, it is: the supply of A creates the demand for A. This misstatement is grotesque.
    2/ Keynes often quotes the name of “Say”, but he doesn’t quote Say’s words. He quotes them only once, at the end of the book, where he doesn’t discuss the validity of Say’s law. This attitude is not very scientific.

    Another example of dishonest mistatement: if some economists criticize the low rates of interest, it's because they are afraid the employment increases excessively. "The austere view, which would employ a high rate of interest to check at once any tendency in the level of
    employment to rise appreciably above the average of, say, the previous decade"...

    “7 - criticising someone for being 'utopian' is not an argument. Any society that approximates the bets we can manage is, by definition, utopian. If you object to that then, well, I don't know.”

    “Utopian” was a urban word for “crank”. Someone who thinks to be able to abolish scarcity in 25 years, or even to abolish it at all, is a crank, and a dangerous one.

    “8 has nothing to do with economics.”

    Keynes has very pretentious claims to originality in its introduction (“The writer of a book such as this, treading along unfamiliar path…”), so to demonstrate the contrary is particularly justified. Moreover, to write about economics history is neither prohibited nor uninteresting.

  6. “5 is ridiculous, Keynes was simply not an authoritarian.”

    The authoritarian mind of Keynes is obvious. I thought the words of Keynes in the foreword of the German edition of the GT (1936) were known by everybody, but, since you seem to ignore them:

    “Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.”

    Moreover, “totalitarian” is largely worst than “authoritarian”.

    In the same way, Keynes expressed often, in a barely hidden manner, that the things would be simpler for him and for the other officials if we lived in an authoritarian state:

    Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expediency, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. »

    “To suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth. It is only in a highly authoritarian society, where sudden, substantial, all-round changes could be decreed that a flexible wage-policy could function with success. One can imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great Britain.”

    He also advocates a “somewhat comprehensive socialisation of investment [which] will prove the only means of securing an approximation to full employment”. In plain English, it means that he wants to set up an economic dictatorship---but only until full employment is achieved. After that, he will give back his powers, of course. Nevertheless, given that he also advocates sticky wages rates, I’m afraid he will be bound to keep his authoritarian powers for a long time.

    1. Sigh. This is probably the worst argument against Keynes you find on the internet. I could link you to Mises talking approvingly of fascism; Hayek saying he preferred a liberal dictatorship to a non liberal democracy; to Rothbard speaking approvingly of torture. But I won't, because they aren't arguments.

      It's quite clear what Keynes meant, and he was right: his economic paradigm would be easier to implement, word for word, under totalitarian conditions. This is true of any economic paradigm (see Chile for an example of laissez-faire dictatorship).

      It is also quite clear that you are seeing what you want to see in the last three quotes. Allow me to offer my interpretations:

      (1) Flexible wage policies are a bad idea in anything other than a totalitarian state.

      (2) Something similar to (1). These are not about Keynes supporting totalitarian positions - they are, in fact, technocratic points. Flexible wage policies ARE easier to apply if the state controls the economy - this is almost tautologically true. Keynes was not, however, suggesting totalitarianism in any way.

      (3) In plain English, it means nothing of the sort - there is a lot of debate over what those words meant, but I've never heard this interpretation before. Some (Skidelsky) interpret him as advocating a national investment bank; others (Tily) interpret it as wanting the CB to lower the long term rate of interest permanently. I believe Michael Emmet Brady also thinks it includes the proposition that speculation should be banned.

      None of what you have said convinces me that Keynes advocates totalitarianism.

  7. On the natural rate of interest, Daniel, I think this video is of great interest. (8:00-13:00)

    "...with money when we traded intertemporally present money for future money we are trading just on the basis of sooner satisfaction and later satisfaction. We've isolated this time preference element in the intertemporal structure of the interest rate..." (11:30)

  8. "I've never been too concerned about this. Even if there isn't a single natural rate, it still seems like the various interest rates out there are compared to whatever "natural rate" might be relevant in a particular situation, and the same dynamics (Keynesian, Austrian, or otherwise) would still apply."

    I find this argument interesting not because of its relevance to Austrian economics - I don't enjoy school-based economics - but because of its implications for thinking about interest rates.

    A natural rate is an own-rate - the difference between an asset's present price and its future price. Own-rates differ markedly. Looking at today's futures markets, the future price of Chicago wheat is above the spot price, whereas the future price of Minneapolis wheat is below the spot price. This means that the own-rate on Minneapolis wheat is negative whereas the own-rate on Chicago wheat is positive. In other words, you get financial compensation for holding Chicago wheat for a few months whereas you get penalized for holding Minneapolis wheat over that same time period. So on the surface, it appears there are two natural rates for very similar commodities. Odd, yes?

    But this difference between own-rates does not mean that holding Chicago wheat provides a superior overall return to Minneapolis wheat. In equilibrium, all returns are equalized by arbitrage.

    So what accounts for the different observable own-rates on Chicago and Minneapolis wheat? First, you have to take into account storage. Sure, you may earn more holding Chicago wheat, but storage costs may be far higher in Chicago so that final returns are equalized. You also have to think about risk. Perhaps holding Minneapolis wheat is far less risky than Chicago wheat (maybe an outbreak of locusts in Chicago), and therefore markets have to compensate Chicago-area speculators with a higher own-rate to compensate for the risk. Lastly, you have to think about liquidity. If Minneapolis wheat is, for the moment at least, more liquid ie. marketable than Chicago wheat, this constitutes a service provided to holders of Minneapolis wheat. As such investors do not need a high own-rate on Minneapolis wheat to encourage them to hold it, since liquidity constitutes its own reward.

    So in sum, you are probably right to not be too concerned about this. Yes, there are an infinite number of observable own-rates in the economy. But an asset's own-rate only constitutes one component of its overall return. When you adjust for all the other factor that constitute an asset's return, Minneapolis wheat and Chicago wheat are providing speculators with the same expected return, despite their different own-rates. If they aren't, their prices will soon adjust. What is that economy wide rate-of-return? We can't see it. It's somewhere out there.


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