Doesn't the concept of a natural (i.e. non-monetary) interest rate lead to their being a unique interest rate (time preference) for every unique good? Then how could such a myriad of "interest rates" be calculated and compared with a money interest rate?
Take a look at the guy RueTheDay arguing here from 8th post on page 3 in this thread:
http://www.politicalcrossfire.com/forum/viewtopic.php?t=122170&start=40
Since I'm not very knowledgable about AE, I can't really say much about it one way or another. But he worries me. Anyone wanna do something about it?
It's not fascism when the government does it.
“We must spend now as an investment for the future.” - President Obama
This isn't a "problem" for Austrian economics. I think Lachmann discusses it in an article of his, trying to find it. This is basically the issue the so-called Neo-Ricardian Sraffa raised in his debate with Hayek. Lachmann summarises the whole affair. I can't recall the exact answer he gives though to their charge. You might want to give this a read too. I haven't yet, but it seems to address the debate in which the issue first arose.
To darkness I condemn you...
Sraffa questioned the very notion of a "natural rate of interest". In an economy that consists of, say, three goods - corn, wheat, and steel, and no money, there would really be three natural interest rates - one each to reflect present corn for future corn, present wheat for future wheat, and present steel for future steel. The interest rate in each case just represents the price of the commodity now relative to the price of the same commodity in the future.
That's just a baseless assertion. Time preference is praxeological theorem, the very existance of human action implies time preference. Why would there be a time preference for each seperate good?
Generally, a commodity now is worth more than in the future, so the interest rate will be positive, but will vary based on the commodity. However, it's quite possible that for some commodities, the interest rate would even be negative - the commonly cited example is that of strawberries in June (right after harvest) versus strawberries in December
Ok well that's great, only, he doesn't understand the idea of the subjective theory of value. Does he really think that obvious of an objection has not been addressed?
Hayek completely accepted Sraffa's argument on this.
Since when is Hayek the God of the Austrian School? He isn't.
If you're interested in this stuff, look up the "Cambridge Capital Controversy". This was the continuation of the debate by Sraffa and his followers. Having soundly defeated the Austrians, his attention turned to the neoclassical version of capital theory.
Only, he didn't defeat the Austrians, in fact, his theory lent support to the Austrian notion of subjective value.
capital theory is largely ignored in order to avoid the problems noted,
What a joke, capital theory is largely ignored because of the problems it poses for the mainstream, who have no adequate conception of capital whatsoever. In fact, that's why their business cycle theories are so bankrupt, they consider capital to be some mysterious fund that replaces itself. Whatever that actually means.
This leads the Austrians to proudly declare "neoclassical economics has no capital theory", but of course they leave out the entire history from their theory being completely refuted through to the formulation and refutation of the neoclassical theory
Why the sudden declaration of victory? Has anybody answered the claims of the various Austrians who replied? I doubt it.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Shostak, in this article, talks about how it's impossible for the Fed to regulate its interest rate to track a natural rate because there's no way to measure or determine the natural rate.
http://mises.org/story/1743#
Ah so he is relying on Sraffa...
No, a homogeneous good is worth more now than one in the future. Are strawberries in December (subjectively) homogeneous to those after harvest? No.
Soundly defeated in which world? The author's fictional one?
By the mainstream, yes. But it has not got the tools to deal with the issues facing it.
OK, so why does Lachmann document and discuss the debate? Why does Garrison? Why does Murphy? Oh wait, perhaps because our "neo-Ricardian" friend is lying?
GilesStratton:Time preference is praxeological theorem, the very existance of human action implies time preference. Why would there be a time preference for each seperate good?
That's at the core of what made me wonder. Isn't there any foundation for the criticism that a non-monetary interest rate would be impossible to calculate beyond the range of a handful persons and goods? How could such a "natural interest rate" be compared to a monetary interest rate, made obvious for everyone by the pricing system? Rather, I just don't understand what is meant with "a natural rate of interest". I have difficulties seeing interest rate being possible without money. The time preference of a person must manifest itself in the choice of some quantity of a good today over a greater quantity of the same good tomorrow, doesn't it? If that good isn't money, then how? Time preference for what?
And yes, most of what that guys says is mumbo jumbo. But it seems to me that he has read up on this aspect of criticism (off topic as it is in that thread though) which he wants to throw in the face of Austrian advocates.
Jon Irenicus: Ah so he is relying on Sraffa... Generally, a commodity now is worth more than in the future, so the interest rate will be positive, but will vary based on the commodity. However, it's quite possible that for some commodities, the interest rate would even be negative - the commonly cited example is that of strawberries in June (right after harvest) versus strawberries in December No, a homogeneous good is worth more now than one in the future. Are strawberries in December (subjectively) homogeneous to those after harvest? No. If you're interested in this stuff, look up the "Cambridge Capital Controversy". This was the continuation of the debate by Sraffa and his followers. Having soundly defeated the Austrians, his attention turned to the neoclassical version of capital theory. Soundly defeated in which world? The author's fictional one? capital theory is largely ignored in order to avoid the problems noted, By the mainstream, yes. But it has not got the tools to deal with the issues facing it. This leads the Austrians to proudly declare "neoclassical economics has no capital theory", but of course they leave out the entire history from their theory being completely refuted through to the formulation and refutation of the neoclassical theory OK, so why does Lachmann document and discuss the debate? Why does Garrison? Why does Murphy? Oh wait, perhaps because our "neo-Ricardian" friend is lying?
Come to think of it, one would have thought that the argument that put the "final nail in the coffin" of AE (courtesy of Blaug) would have had more attention devoted to it by the Austrians. Especially considering that the entire argument lends support to AE, rather than detract from it. These comments come in especially bad taste from the mainstream who barely give Austrian economics any mention besides the occasional strawman.
I just read Murphy's article from what I can see of the whole thing, citing it just proves that one has no understanding of praxeology. More specifically, one does not understand that Bohm-Bawerks idea of a "round about" production process was not even a part of praxeology, and is instead a technological question. One only need understand that from the subjectivist view any decrease in time preference means that actors extent their range of planning and as such the production process increases.
ProudCapitalist: That's at the core of what made me wonder. Isn't there any foundation for the criticism that a non-monetary interest rate would be impossible to calculate beyond the range of a handful persons and goods? How could such a "natural interest rate" be compared to a monetary interest rate, made obvious for everyone by the pricing system? Rather, I just don't understand what is meant with "a natural rate of interest". I have difficulties seeing interest rate being possible without money. The time preference of a person must manifest itself in the choice of some quantity of a good today over a greater quantity of the same good tomorrow, doesn't it? If that good isn't money, then how? Time preference for what?
Well, to begin with Austrian capital theory holds true without stipulating a market for loanable funds. It merely refers to the spread of capital across the stages of production. Time preference merely means that an individual prefers present goods to future goods, which is implied in action. If one did not prefer present goods to future goods one simply would not act.
A natural rate of interest only refers to the collective time preference of the people within society, to the extent to which they prefer present goods to future goods. I can imagine that it might be difficult to conceive now that I come to explain it. But the monetary rate of interest is just an explicit price for present goods relative to future goods, just like any other market price. Once you consider that money usually functions to purchase goods as opposed to being demanded for its own sake (I believe there is some controversy within the Austrian school concerning whether or not their is demand for money) it's easy to see what the natural rate of time preference is.
I have difficulties seeing interest rate being possible without money. The time preference of a person must manifest itself in the choice of some quantity of a good today over a greater quantity of the same good tomorrow, doesn't it? If that good isn't money, then how? Time preference for what?
The good in question? Money is just a good. One of many. All the truth that is being recognised states is that the same quantity of a (homogeneous) good won't service me as much in the future as it services me right now. If it's not homogeneous then this doesn't apply.
So the money rate of interest is only a specific implementation of the natural rate of interest? It is the natural rate of interest on the good which is money.
Well, I should've understood it to be that simple. I just keep thinking that "money is special". I need to cure that.
How do "natural rate of interest" and "monetary rate of interest" relate to each other in AE? Is there discrepancy only when monetary inflation is forced upon a market?
GilesStratton: "If one did not prefer present goods to future goods one simply would not act."
That certainly sounds like very hard stronghold, yes.
Yeah, treating money as a special case might be what's causing the confusion, but the problem I saw with that poster's example of the strawberries was that he does not comprehend what TP refers to.
As for the market rate, no, things like risk also need to be factored in. TP relates to the pure rate of interest.
Jon Irenicus:As for the market rate, no, things like risk also need to be factored in. TP relates to the pure rate of interest.
Also, the market rate will never equal the "true" rate for the same reason it is true of any other price.
Wow. Nicely put. Ive been trying to find a way to explain it so that my keynesian friends can understand..This is it!
Manny Mars
I have a theory on the interest rate. I'd like you to check it out and tell me your thoughts...
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