by When Austrians (metaphorically) shoot themselves in the foot, the results are usually amusing.We are treated to just such a delightful spectacle here: Robert P. Murphy, “Mises and the Market,” Dailycaller.com, 26th August, 2015. http://dailycaller.com/2015/08/26/mises-and-the-market/ This is Robert Murphy’s defence of the Austrian business cycle theory (ABCT) as an explanation of recent global turmoil on stock markets and other economic problems.The astute reader will notice that in the course of the article Murphy casually mentions the Wicksellian natural rate of interest as the foundation of the ABCT.But wait a minute … Isn’t Robert Murphy the author of this paper called “Multiple Interest Rates and Austrian Business Cycle Theory”?In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?: “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.
Topics:
Lord Keynes considers the following as important: Austrian Business Cycle Theory (ABCT), Austrian economics, critique, Robert Murphy, Wicksellian natural rate of interest
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We are treated to just such a delightful spectacle here:
This is Robert Murphy’s defence of the Austrian business cycle theory (ABCT) as an explanation of recent global turmoil on stock markets and other economic problems.
The astute reader will notice that in the course of the article Murphy casually mentions the Wicksellian natural rate of interest as the foundation of the ABCT.
But wait a minute … Isn’t Robert Murphy the author of this paper called “Multiple Interest Rates and Austrian Business Cycle Theory”?
In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?:
And now the crucial quotation from 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.
Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).
So in print before our eyes Murphy has rejected the Wicksellian natural rate of interest – a “natural” and market rate of interest that would equilibrate savings and investment. We can add to this the rather embarrassing point that Murphy also agrees with Keynes that interest rates are a monetary phenomenon and a great part of Murphy’s PhD is devoted to defending a monetary theory of interest (as opposed to the Wicksellian theory).“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.”
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).
But his recent defence of the ABCT just assumes that such a single Wicksellian natural rate of interest exists and doesn’t even mention his own rejection of the concept.
Is Murphy capable of explaining to us why the classical Austrian business cycle theory doesn’t collapse to its foundations if the natural rate is untenable as argued in his paper “Multiple Interest Rates and Austrian Business Cycle Theory”? Isn’t this massive hypocrisy on his part?
There are also a couple of other points I can’t resist addressing. Murphy in his article states the following:
This is of course a claim from the classical ABCT: that artificially low interest rates drive excessive investment and create massive malinvestment leading to real capital scarcity and shortages and in some cases actually lack of resources to finish projects.“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.
Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.”
Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/
Anyone can see that this is a bizarrely – if not insanely – inaccurate description of capitalist economies since 2008, where there was massive idle resources, huge unemployment and significant unused industrial capacity.
It is also especially laughable because right after the quotation above, Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged malinvestment by industrial firms or in real capital projects.
All in all, the Austrian story on modern capitalism is refuted by the empirical evidence and in Murphy’s case refuted by his own previously expressed ideas on the non-existence of the natural rate of interest.
Further Reading
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.
“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.
“Daniel Kuehn on the Austrian Business Cycle Theory,” December 5, 2013.
“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.
“Another Example of Wicksell’s Second Definition of the Natural Rate of Interest,” October 8, 2014.
“My Posts on the Natural Rate of Interest,” November 19, 2014.
BIBLIOGRAPHY
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
http://consultingbyrpm.com/uploads/Dissertation.pdf
Murphy, Robert P. 2011. “Is Keynes from Heaven or Hell,” 7 July.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html
Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/