I've heard Keynesians claim Sraffa 'destroyed' Hayek's work, do you guys agree?
Aah, finally this topic is talked through.
Hayek says that there are multiple interest rates: one for each commodity.
Arbitrage, If we assume a condition of monetary equilibrium and perfect information, should equalize the interest rates of all commodities so that there is one, uniform rate, representing the valuation placed on consumer goods (as a category) relative to producer goods (as a category). The same way that the return on all equities, in a state of perfect information and monetary equilibrium, should be the same (varying yields reflect liquidity and risk considerations as well as maturities, but all 3 go hand-in-hand).
The key point is, as has already been alluded to, you don’t need a uniform ‘natural’ rate of interest to show that monetary injections yield disproportionate effects on relative prices (and therefore profits) yielding malinvestments, perpetuated by a condition of disequilibrium in the loan-market (investment > saving).
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
So, what Hayek really meant by "neutral money" and the "natural rate of interest(s)" was reference to equilibrium values, where fiduciary overexpansion is seen as a rupture of this equilibrium — equilibrium, of course, is also used as a means of theoretical exposition
Hayek never makes any reference to natural "rates" of interest in Prices and Production. This is just re-wiritng history:
"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 equalise 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, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.
Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains " neutral " in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices ;"
Prices and Production, pp. 23-24.
Funny, because that excerpted passage pretty much underscores my argument. ;)
But he did make reference to them right after Sraffa brought them up, directly replying to Sraffa.
Thanks to Meng Hu for quoting the whole thing at length, with sources, right here; http://menghusblog.wordpress.com/2012/02/19/sraffa-and-hayek-on-multiple-interest-rates/
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Yet made reference to "natural rates" but Hayek never refuted Sraffa's criticisms.
Read your fellow Austrian Robert Murphy:
“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.
....
“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to “the” natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below “the” natural rate, because there is no such thing."
Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
Funny, because that excerpted passage pretty much underscores my argument.
Yeah, it does no such thing.
You implied that Hayek spoke of natural rates of interest in Prices and Production and already dealt with the issue there.
You're wrong: plain and simple.
Jonathan M. F. Catalán: Sraffa missed Hayek's point in the rejoinder — focusing on what Hayek claimed to be secondary to the actual argument. Further, Sraffa mistakes Hayek's "neutral money" for some kind of policy recommendation, or some kind of guide that we ought to consider. In his response to Sraffa's original critique ofPrices and Production, Hayek is explicit in arguing that his reference to "neutral money" was not what Sraffa made of it. Rather, it was an explanatory device to help explain the concept of the structure of production and the distribution of real goods between the different stages of production. In fact, Prices and Production is one big tract on how the non-neutrality of money can lead to major industrial fluctuations. So, what Hayek really meant by "neutral money" and the "natural rate of interest(s)" was reference to equilibrium values, where fiduciary overexpansion is seen as a rupture of this equilibrium — equilibrium, of course, is also used as a means of theoretical exposition (which if not obvious, is at least clarified in Hayek's monograph Profits, Interest and Investment [1939]). What Hayek was really interested in was the process by which this equilibrium could be ruptured, or fiduciary overexpansion — what he called "phantom profits." You don't need a "natural rate of interest" to see the effects of phantom profits, and this is what Hayek was trying to get across in his response to Sraffa (a point that Sraffa obviously missed). This is probably a major reason why in his 1939 monograph Hayek prefers to talk about the rate of profit, rather the rate of interest.
Sraffa missed Hayek's point in the rejoinder — focusing on what Hayek claimed to be secondary to the actual argument. Further, Sraffa mistakes Hayek's "neutral money" for some kind of policy recommendation, or some kind of guide that we ought to consider. In his response to Sraffa's original critique ofPrices and Production, Hayek is explicit in arguing that his reference to "neutral money" was not what Sraffa made of it. Rather, it was an explanatory device to help explain the concept of the structure of production and the distribution of real goods between the different stages of production. In fact, Prices and Production is one big tract on how the non-neutrality of money can lead to major industrial fluctuations. So, what Hayek really meant by "neutral money" and the "natural rate of interest(s)" was reference to equilibrium values, where fiduciary overexpansion is seen as a rupture of this equilibrium — equilibrium, of course, is also used as a means of theoretical exposition (which if not obvious, is at least clarified in Hayek's monograph Profits, Interest and Investment [1939]).
What Hayek was really interested in was the process by which this equilibrium could be ruptured, or fiduciary overexpansion — what he called "phantom profits." You don't need a "natural rate of interest" to see the effects of phantom profits, and this is what Hayek was trying to get across in his response to Sraffa (a point that Sraffa obviously missed). This is probably a major reason why in his 1939 monograph Hayek prefers to talk about the rate of profit, rather the rate of interest.
Jonathan, for those of us who are not as deeply steeped in economic jargon and lingo, could you (quickly) summarize this in laymen's terms? I totally understand ABCT and Praxeology (Have read Human Action and Man economy and state) but I am afraid much of your post contains terms I am not familiar with (such as non-neutrality of money, fiduciary over-expansion, phantom profits), but I think there is probably some things I should know here. Also, a nice laymens summary of the debate would be nice. Can anyone provide a link that does this well? I never mind reading and learning some new terms, just need a nudge in the right direction here. Thanks.
"If men are not angels, then who shall run the state?"
Edit: oops
Excellent.
Especially the Finish, which emphasized that the real problem is credit expansion, not interest rates per se.
Looking forward to more English articles.
http://econo-miaytuya.blogspot.com.ar/2013/01/sraffallacies-misesian-defense-of-abct-i.html
Well done. I didn't know about the fact that Sraffa's idea comes from Fisher's. But I know the relevant passage of Hazlitt where he quoted Fisher. I haven't noticed that this was the same point made by Sraffa but later. Strange. Anyway, as I have already said again and again, insofar as they are many prices in the market, and interest rates being a "price", that is, a price for loans, no one should be surprised by the non-existence of a unique rate. What is ridiculous is that keynesians, or more generally, the anti-austrians point us to Sraffa's critique as if they have found something new.
Also, about what you said here :
"A lowering rate as consequence of credit expansion is what creates a boom. The cycle is not caused by a lower interest rate per se, but by a lowering via credit expansion."
I have to repeat once again. Indeed, there is distinction between the interest rate and the credit expansion. And Hayek said so. If you are familiar with the free banking theory, for example see Selgin's book, (1988) chapter 5.
http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2307&chapter=218696&layout=html&Itemid=27
When banks create money in order to accomodate people's desire to hold money, this will not engender a business cycle even though the interest rates decrease. You can also see "The structure of production reconsidered" by Hulsman.
And one more thing. The fact that the economic forces are moving, constantly, would obviously suggest that there could not be any natural rate in the real world, and clearly the ABCT is not assuming this. Natural or static prices, including interest rates of course, would never appear. Critiques of austrian school who are pointing us to Sraffa, and claiming having read Mises and other austrians should not be taken too seriously. A perfect example of this, is the guy who runs the blog Social Democracy for the 21st Century.
Now hmm... a word about your pictures of Mortal Kombat. The characters are changing at each successive pictures. Which one is Sraffa ?
Don't forget to tell us when the second article of your series is finished. I found the first one delicious. I want more. And I think everyone should read the above article. A bit lengthy but enlightening for those who haven't especially followed the Sraffa-Hayek debate.
Hi guys!! Here is the second part! :D
http://econo-miaytuya.blogspot.com.ar/2013/01/sraffallacies-misesian-defense-of-abct.html
Rodolphe you said: “When banks create money in order to accomodate people's desire to hold money, this will not engender a business cycle even though the interest rates decrease.”
However I do really believe that even in this circumstance a credit expansion can create a cycle and that such an expansion is not necessary at all. Actually the market process can assure employment and coordination (with unhampered prices) whether that increase in demand for money is anticipated or not. (see here, here and here) And Despite the fact that I really like much of Hülsmann’s analisys, I am in Newman side on the issue of structure of production, but we can argue another time ;)
Thank you very much for the comments guys!
oh! by the way, the Mortal Kombat pictures are random, just decoration. My plan was to photoshop every picture with an image of Sraffa and Mises, but that would have taken a loooot of time, so I let them in their original form.
Excellent post Guille
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger