Tuesday, June 24, 2008

Conversations Elsewhere

Over at the Austrian Economists' blog, the comments on one post are mostly about Sraffa versus Hayek. The defenders of Hayek want to redefine the "natural rate" of interest to be the rate that would prevail in a monetary economy if the financial system did not "distort" prices somehow. This definition is opposed to the definition as the interest rate that would prevail in a barter economy. The defenders don't seem to realize that this redefinition addresses neither Sraffa's 1930s point that there are as many natural rates as there are commodities in an intertemporal equilibrium nor the 1960s reswitching results.

A Yahoo group is about Sraffa. Spanish-language discussions do me little good since I am limited to English.

Update: Gabriel Mihalache has a discussion about General Equilibrium theory that ends up overlapping with a discussion of Sraffa.

1 comment:

Anonymous said...

They seem to have missed the point of Sraffa's argument.

Sraffa noted that Hayek's desire for "neutral" money was simply impossible in any real capitalist economy for "a state of things in which money is 'neutral' is identical with a state in which there is no money at all." ("Dr. Hayek on Money and Capital," pp. 42-53, The Economic Journal, vol. 42, no. 165)

Sraffa also noted that the starting point of Hayek's theory was flawed: "An essential confusion . . . is the belief that the divergence of rates is a characteristic of a money economy . . . If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any moment as many 'natural' rates of interest as there are commodities, though they would not be 'equilibrium' rates. The 'arbitrary' action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) 'arbitrarily changed' the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate."

Hayek admitted that this was a possibility, to which Sraffa replied:

"only under conditions of equilibrium would there be a single rate, and that when saving was in progress there would be at any one moment be many 'natural' rates, possibly as many as there are commodities; so that it would be not merely difficult in practice, but altogether inconceivable, that the money rate would be equal to 'the' natural rate . . . Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates.' The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates." ["A Rejoinder," pp. 249-251, Vol. 42, No. 166]

Of course, the assumption that the banks "distort" the interest rate suggests that the only way to stop the business cycle is to stop banks acting like, well, capitalists.

Or regulating them extremely closely -- Rothbard wanted to make it law that banks had a 100% gold reserve. Interesting to see how that would work, particularly in a system based on private courts.

Interesting, that the non-equilibrium and anti-regulation Austrians forget all that when it comes to the banking industry...

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