A mistaken theory claims prices convey information about relative scarcities. Friedrich Hayek uses an example of tin. According to this theory, a higher wage incentivizes investments in less labor-intensive techniques and to shifting production towards less labor-intensive commodities. Likewise, a lower interest rate incentivizes investments toward more capital-intensive techniques and to shifting production towards more capital-intensive commodities.
A number of attempts have been made to elaborate this theory and to formalize this vision:
- One can measure capital-intensity by aggregating the prices of capital goods used, per person-year of labor employed, in producing a commodity. Around switch points, a lower interest rate is associated with the adoption of a more capital-intensive technique. This approach can be seen in the mainstream economist Edwin Burmeister's work with David Champerowne's chain-index measure of capital.
- One can measure capital-intensity by the period of production, which is a weighted sum of the prices of dated unproduced inputs (labor and land). The weights, in Eugen Böhm-Bawerk's approach are based on a simple interest model. A lower interest-rate is associated with an increase in the period of production.
- Capital goods include machines that operate with constant efficiency over their physical life. Lower interest rates are associated with the adoption of techniques with longer-lived machines. Ian Steedman's corn-tractor model provides a framework to investigate this approach.
- Capital goods include machines that operate with variable efficiency over their physical life. Lower interest rates are associated with the lengthening of the economic life of machines.
- One can measure the period of production by a financial approach, as in the work of Nicolás Cachanosky and Peter Lewin. Their Duration is a rediscovery of J. R. Hicks' average period of production.
The lack of foundation of these approaches can be seen by the existence of numeric counter-examples. These counter-examples are set in a framework in which market prices are attracted by prices of production.
Examples of negative real Wicksell effects show, as acknowledged by Burmeister, that the first approach is, at best, an arbitrary special case. The existence of price Wicksell effects invalidates the second approach. Steedman shows that the third approach is, again, an arbitrary special case. Numeric examples from Bertram Schefold and others show the fourth approach relies on another special case. I have demonstrated that the issues with the fourth approach are independent of the issues with the first approach.
Saverio Fratini has shown that the fifth approach is compatible with reswitching. A more roundabout technique of production, by the measure of Duration, can result in less net output per worker. This result seems contrary to what those formalizing measures of capital-intensity intend.
One could respond to above with mysticism, maintaining the doctrines of Austrian capital theory, while refusing to state anything clearly. As I understand it, this is the approach of Jésus Huerta de Soto and others.
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5 comments:
«The lack of foundation of these approaches can be seen by the existence of numeric counter-examples.»
But that is not the big deal: I doubt that any realistic theory of the political economy can be done without numeric counter-examples, and if one could be done it would be unrealistic. Reswitching is a big deal for those who claim that their theories "prove" the three "fables" of JB Clark, but otherwise it could be ignored if it were rare in practice.
The problem with these approaches is that they are both grossly unrealistic and the counter-examples are pretty big.
Ah if we could only have an approximate but realistic theory with some but not many and not important counter-examples (which reminds me of so-called "weak logics" where some false theorems can be proven but it is very difficult or rare).
«These counter-examples are set in a framework in which market prices are attracted by prices of production.»
That smithian “attract” is very optimistic, especially as many commodities are "non-economic" and still quite important, for example many "collectibles".
But still a theory that demonstrated how much costs of production “attract” exchange prices would be nice even if somewhat incomplete. I still reckon that exchange price schedules are bands rather than curves, and costs of production are usually the lower boundary for exchange prices. But of course every Economist wants to have a theory where exchange prices are *uniquely* determined by something :-).
«Lower interest rates are associated»
As usual when I read "interest rates" I feel nauseous, because the conventional wisdom of Economics is that it is tenable to simplify a complex topic with the assumptions that there is a single interest rate, which is the same for active and passive sides and the same as the rate of profit, because "competition".
«costs of production “attract” exchange prices [...] the three "fables" of JB Clark [...] the assumptions that there is a single interest rate, which is the same for active and passive sides and the same as the rate of profit»
It just occurred to me a short way to explain the agenda of JB Clark (and also in effect of the "austrians") as there is something relating costs of production, prices of exchange, rate of profit/interest rate: whether profit/interest is a cost of production or not, whether the cost of production of "factors of production" do "attract" their prices of exchange.
The claim of JB Clark and other advocates of orthodoxy in Economics is that profit is not a residual ("sur-plusvalue") between costs of production and prices of exchange, but is a cost of production, in that it is the price (interest rate) of deferring consumption ("saving") as needed to accumulate "capital", so it must exist even in condition of perfect competition where the costs of production of factors fully "attract" their prices of exchange (so that there is a single "rate of interest"/"rate of profit").
Note: it is late and I am particularly sleepy so the above may not be expressed that clearly.
I am not sure what I am going to do with my exploration of this critique of the Austrian school. I think you are correct in that marginalists treat interest is a cost.
«correct in that marginalists treat interest is a cost»
Please let me insist on the pedantry that orthodox Economists (indeed mostly marginalists, but not just) regard *profit* as a cost, even if they fantasize that given perfect competition the (risk-adjusted) profit rate on investment and the interest rate on money must be equal.
As to that my usual argument is that as JM Keynes pointed out the interest rate(s) are not on "money" but on *liquidity*, that is they are the price of deferring investment (not consumption) to more profitable future opportunities.
As such the interest rate(s) are indeed a cost (which profit is not), more precisely a rent caused by the relative scarcity of liquidity vs. investment opportunities (thus JM Keynes thought that as liquidity more abundant the "euthanasia of the rentier" might happen).
Note: profit (may) comes from being illiquid (having invested), interest (may) comes from being liquid (not having invested yet).
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