Sunday, July 24, 2011

Murphy On Sraffa's Victory In Debates On ABCT

Robert P. Murphy has provided electronic access to his article, "Multiple Interest Rates and Austrian Business Cycle Theory". Murphy presented this paper at a Liberty Fund conference a number of years ago. (At least one other has commented on this paper. Has Murphy on his blog brought up his papers, also growing out of his PhD thesis, in the Journal of the History of Economic Thought?)

Many fanboys of so-called Austrian economics that you may meet, especially on the Internet, are ignorant of economics, including the economics of the Austrian school. For some reason, proclaiming themselves to be members of this tribe and moralizing about outsiders fills an emotional need for some. Even among academics adhering to this school, I have noticed little discussion, for example, of the distinction between Mises' Evenly Rotating Economy and Hayek's notion of plan compatibility in an intertemporal equilibrium. (I can provide caveats.)

These strictures do not apply to Murphy. He is fully aware of this distinction. And he accepts that the variation of own rates of interest among commodities outside steady states overthrows Hayek's exposition of Austrian Business Cycle Theory (ABCT) in Prices and Production. Murphy should and does acknowledge the correctness of Sraffa on this point in his debate with Hayek over ABCT.

In my critique of ABCT (on other grounds), I end up with a bibliography consisting almost exclusively of recent work by heterodox economists. Murphy's bibliography is like this, except his heterodox economists are drawn exclusively from one school.

Nevertheless, Murphy should include a selection of references from other traditions, including mainstream economics. No matter what one may think of mutualism, Kevin Carson (2004) is not a good cite for "a modern statement of classical price theory". Kurz and Salvadori (1995) is a more canonical modern statement. Debreu (1959) and Arrow & Hahn (1971) are standard references for intertemporal equilibrium. Hahn (1982) explains how own-rates of interest vary among goods in such models. Boehm (1986) strives to distinguish the mainstream concept of intertemporal equilibrium from Hayek's. Hicks (1946) and Grandmont (1977) are two canonical statements of temporary equilibrium. Samuelson (1958), Diamond (1965), Benhabib (1992 & 2008) and Geanakoplos (2008) describe Overlapping Generations (OLG) models.

Economists have established, I think, that conditions on the parameters of short-run equilibrium models (e.g., in intertemporal and temporary equilibrium models) fail to limit the dynamics of equilibrium paths in such models. I like to draw on the Cambridge Capital Controversies and on the Sonnenschein-Mantel-Debreu theorem to argue for this result.

Since the dynamics are unlimited, one should be able to construct examples in such models of cycles. Of the literature I have read, I find, perhaps because of my own limitations, too few concrete examples. It is my understanding that cycles can arise in these models, even if expectations are being fulfilled and plans continue unchanged. This may be an unduly restrictive approach to expectations, but, given the current hegemony of neoclassical economics, other approaches need an explicit motivation. Post Keynesians and, I guess, the Austrian school have such a motivation in their emphasis on historical time. But I do not see Murphy connecting up this emphasis to his story in his paper. (I need to reread his section on "Meeting Sraffa's Objection" with more attention to ensure the story is coherent.) Murphy wants agents in his story to make mistakes through responses to the monetary authority. But these are basically barter models. Introducing money into such models is challenging, and Murphy might want to examine some attempts in the literature.

I think established results should lead one to drop an insistence on methodological individualism (or microfoundations) in macroeconomic research along these lines. In any case, I fail to see what is specifically "Austrian", especially inasmuch as the Austrian school relates to the ABCT, about such a description of business cycles.

  • Kenneth J. Arrow and Frank H. Hahn (1971). General Competitive Analysis, Holden-Day [I haven't read this].
  • Jess Benhabib (editor) (1992). Cycles and Chaos in Economic Equilibrium, Princeton University Press [I haven't read this].
  • Jess Benhabib (2008). "Chaotic Dynamics in Economics", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
  • Stephan Boehm (1986). "Time and Equilibrium: Hayek's Notion of Intertemporal Equilibrium Reconsidered" in Subjectivism, Intelligibility, and Economic Unerstanding (ed. by I. M. Kirzner), New York University Press.
  • Kevin A. Carson (2004). Studies in Mutualist Political Economy.
  • Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press.
  • Peter A. Diamond (Dec. 1965). "National Debt in a Neoclassical Growth Model", American Economic Review, V. 55, Iss. 5: 1126-1150.
  • John Geanakoplos (2008). "Overlapping Generations Model of General Equilibrium", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
  • Jean Michel Grandmont (Apr. 1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3: 535-572.
  • Frank Hahn (1982). "The Neo-Ricardians", Cambridge Journal of Economics, V. 6: 353-374.
  • J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press,
  • Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
  • Robert P. Murphy. "Multiple Interest Rates and Austrian Business Cycle Theory".
  • Paul A. Samuelson (Dec. 1958). "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money", Journal of Political Economy, V. 66, N. 6: 467-482.

1 comment:

Lord Keynes said...

Great post.

Murphy's admissions in the article are significant:

"“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."

Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12.