Saturday, November 3, 2012

Mataias Vernengo on Austrian Business Cycle Theory

There is a lot to agree with and a lot to disagree with in this post. First, I'd agree with him that Austrian business cycle is basically mainstream neoclassical. There's nothing about it that a neoclassical economist would have trouble accepting. That's to its credit in my view, not in his view (and not to someone like Peter Boettke either). What I mean by this is simply that the innovation of ABCT is the capital structure, but the logic behind the capital structure and the behavior of the capital structure in response to monetary changes is thoroughly neoclassical. That shouldn't be surprising, of course: Menger, Bohm-Bawerk, and Wicksell were all neoclassical economists.

He then gets into Sraffa, which is where I disagree more. This is going to be just like the last two Ellsberg posts where I wade into something that some people care deeply about and say "meh - doesn't seem like all that big of a deal to me". In this case I feel on somewhat firmer ground, though, because although I'm not particularly well versed in Sraffa I feel like I know how both Keynesians and Austrians think about interest rates pretty well. Mataias writes:

"There should be little doubt that Hayek believed that fluctuations were caused by monetary shocks, and that equilibration was based on the adjustment of a monetary rate to a natural rate [good so far - DK] [Remember his debate with Sraffa? One of the key issues in Sraffa's critique of Hayek was that he argued that latter's claim that the possibility of a difference between own rates of interest and thus a divergence of some rates from the equilibrium or natural rate is a characteristic of a money economy that is absent in a barter economy was simply wrong since there was no unique natural rate of interest from which the money rate could differ]."

As I said, I only know Sraffa in a vague way and his point that there is no unique natural rate of interest seems correct to me (we had this discussion before with Bob Murphy, J.P. Koning, and others and I think we were largely fine with that). But I don't see how that poses a problem for Austrian business cycle theory (neither did Hayek, and neither does Bob Murphy). The way I think about it is this: yes everything has its "own rate" of interest. That means that any given basket of goods is going to give you a different "natural rate" of interest, which seems to imply that there's no substance to the natural rate in Hayek's theory. But the point is that despite these varying own rates a lower interest rate is still going to lead to an elongated capital structure regardless of the different own rates. You're going to buy less of a good with a relatively high own rate than one with a relatively low own rate, certainly. But when interest rates are relatively low you're still going to buy more capital goods that payoff on a longer time horizon than you would have before, even though those longer time horizon capital goods may have own rates that vary amongst each other. These varying own rates seem like they could change the composition of output but they don't change the underlying story of how the capital structure changes over the business cycle and in response to credit injections. In other words, I'll agree with Sraffa that Hayek offers an abstraction from reality but I'm not sure how that changes the fundamental story of ABCT. That seems to emerge intact. As long as capital goods with a longer time horizon require lower interest rates to be used in production than capital goods with shorter time horizons (something which, as far as I know, Sraffa's point doesn't change), I don't see what problem this poses for ABCT.

At the end, Mataias suggets that the only interesting Austrian is Schumpeter. Schumpeter is fine, but I still like Hayek. I'm not sure his description of the business cycle was particularly important in practice but the description of the process seems solid to me and it's certainly an interesting elaboration on how we usually think about things.


  1. I had a similar sort of debate with "Lord Keynes" in the comment thread here:

    I still don't get how multiple-rates of interest are supposed to necessarily negate ABCT. I suppose they could in very specific situations, but I don't understand what scenario LK and co have in mind.

  2. Maybe I read the Sraffa–Hayek debate, but for the life of me I don't get why people consider the "multiple rate of interest" point a mark against Hayek. The way I read his response, Hayek argues that each commodity has its own rate of interest. Sraffa, in his second article, argues that the rate of interest should converge between commodities. But, yes, the main point is the "natural rate of interest" theory isn't crucial to ABCT, which was Hayek's principal point in his response to Sraffa.

  3. re:"There's nothing about it that a neoclassical economist would have trouble accepting."

    I agree up to a point. Two potential/possible points of disagreement that immediately come to mind are the role of expectations and the adjustment of industry to changes in consumer goods demand. There's a reason that guys like Hicks and Baumol didn't agree with Hayek's theory.

  4. Yep, I agree. I don't think Sraffa's critique is a big deal. Yes, every one of the world's millions of assets has its own peculiar own-rate, as Sraffa pointed out. But when you abstract from each asset's liquidity, risk, and storage cost, the returns over assets are all equal. If not, arbitrage will iron differences out. When central banks reduce the "interest rate below the natural rate" they are reducing the return on central bank liabilities below the return on all other assets... with Austrian style effects being one of the possible outcomes as people try to adjust.


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