Did Sraffa 'annihilate' Hayek as some Keynesians say?

[Lord_Keynes]

But he did make reference to them right after Sraffa brought them up, directly replying to Sraffa.

Yet made reference to “natural rates” but Hayek never refuted Sraffa’s criticisms.

Read your fellow Austrian Robert 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.

…

“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."

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

http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html

[Lord_Keynes]

Funny, because that excerpted passage pretty much underscores my argument.

Yeah, it does no such thing.

You implied that Hayek spoke of natural rates of interest in Prices and Production and already dealt with the issue there.

You’re wrong: plain and simple.

[Texas_Trigger]

@Jonathan M. F. Catalán

Sraffa missed Hayek’s point in the rejoinder — focusing on what Hayek claimed to be secondary to the actual argument. Further, Sraffa mistakes Hayek’s “neutral money” for some kind of policy recommendation, or some kind of guide that we ought to consider. In his response to Sraffa’s original critique ofPrices and Production, Hayek is explicit in arguing that his reference to “neutral money” was not what Sraffa made of it. Rather, it was an explanatory device to help explain the concept of the structure of production and the distribution of real goods between the different stages of production. In fact, Prices and Production is one big tract on how the non-neutrality of money can lead to major industrial fluctuations. So, what Hayek really meant by “neutral money” and the “natural rate of interest(s)” was reference to equilibrium values, where fiduciary overexpansion is seen as a rupture of this equilibrium — equilibrium, of course, is also used as a means of theoretical exposition (which if not obvious, is at least clarified in Hayek’s monograph Profits, Interest and Investment [1939]).

What Hayek was really interested in was the process by which this equilibrium could be ruptured, or fiduciary overexpansion — what he called “phantom profits.” You don’t need a “natural rate of interest” to see the effects of phantom profits, and this is what Hayek was trying to get across in his response to Sraffa (a point that Sraffa obviously missed). This is probably a major reason why in his 1939 monograph Hayek prefers to talk about the rate of profit, rather the rate of interest.

Jonathan, for those of us who are not as deeply steeped in economic jargon and lingo, could you (quickly) summarize this in laymen’s terms? I totally understand ABCT and Praxeology (Have read Human Action and Man economy and state) but I am afraid much of your post contains terms I am not familiar with (such as non-neutrality of money, fiduciary over-expansion, phantom profits), but I think there is probably some things I should know here. Also, a nice laymens summary of the debate would be nice. Can anyone provide a link that does this well? I never mind reading and learning some new terms, just need a nudge in the right direction here. Thanks.

[Smiling_Dave]

Edit: oops

[guillazo]

Hi Gast! I know I’m a little late for this discussion but I have recently posted something about this issue in my blog. It’s a (long and quoted) misesian response (not a hayekian one) using Mises’ own writings. Just have a look! ;D

Sraffallacies: A Misesian Defense of ABCT (I)

[Smiling_Dave]

Excellent.

Especially the Finish, which emphasized that the real problem is credit expansion, not interest rates per se.

Looking forward to more English articles.

[Rodolphe_Topffer]

http://econo-miaytuya.blogspot.com.ar/2013/01/sraffallacies-misesian-defense-of-abct-i.html

Well done. I didn’t know about the fact that Sraffa’s idea comes from Fisher’s. But I know the relevant passage of Hazlitt where he quoted Fisher. I haven’t noticed that this was the same point made by Sraffa but later. Strange. Anyway, as I have already said again and again, insofar as they are many prices in the market, and interest rates being a “price”, that is, a price for loans, no one should be surprised by the non-existence of a unique rate. What is ridiculous is that keynesians, or more generally, the anti-austrians point us to Sraffa’s critique as if they have found something new.

Also, about what you said here :

“A lowering rate as consequence of credit expansion is what creates a boom. The cycle is not caused by a lower interest rate per se, but by a lowering via credit expansion.”

I have to repeat once again. Indeed, there is distinction between the interest rate and the credit expansion. And Hayek said so. If you are familiar with the free banking theory, for example see Selgin’s book, (1988) chapter 5.

http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2307&chapter=218696&layout=html&Itemid=27

When banks create money in order to accomodate people’s desire to hold money, this will not engender a business cycle even though the interest rates decrease. You can also see “The structure of production reconsidered” by Hulsman.

And one more thing. The fact that the economic forces are moving, constantly, would obviously suggest that there could not be any natural rate in the real world, and clearly the ABCT is not assuming this. Natural or static prices, including interest rates of course, would never appear. Critiques of austrian school who are pointing us to Sraffa, and claiming having read Mises and other austrians should not be taken too seriously. A perfect example of this, is the guy who runs the blog Social Democracy for the 21st Century.

Now hmm… a word about your pictures of Mortal Kombat. The characters are changing at each successive pictures. Which one is Sraffa ?

Don’t forget to tell us when the second article of your series is finished. I found the first one delicious. I want more. And I think everyone should read the above article. A bit lengthy but enlightening for those who haven’t especially followed the Sraffa-Hayek debate.

[guillazo]

Hi guys!! Here is the second part!

http://econo-miaytuya.blogspot.com.ar/2013/01/sraffallacies-misesian-defense-of-abct.html

Rodolphe you said: “When banks create money in order to accomodate people’s desire to hold money, this will not engender a business cycle even though the interest rates decrease.”

However I do really believe that even in this circumstance a credit expansion can create a cycle and that such an expansion is not necessary at all. Actually the market process can assure employment and coordination (with unhampered prices) whether that increase in demand for money is anticipated or not. (see here, here and here) And Despite the fact that I really like much of Hülsmann’s analisys, I am in Newman side on the issue of structure of production, but we can argue another time

Thank you very much for the comments guys!

[guillazo]

oh! by the way, the Mortal Kombat pictures are random, just decoration. My plan was to photoshop every picture with an image of Sraffa and Mises, but that would have taken a loooot of time, so I let them in their original form.

[Jargon]

Excellent post Guille

[Smiling_Dave]

Excellent post Guille

Agree.

Guille, I am interested in your take on my earlier post, in particular the last part.

https://forum.freecapitalists.org/t/did-sraffa-annihilate-hayek-as-some-keynesians-say/24452/8

[fegeldolfy]

“Lord Keynes” has responded on his blog.

http://socialdemocracy21stcentury.blogspot.com/2013/01/the-natural-rate-of-interest-and.html

[Rodolphe_Topffer]

Read it. Lord Keynes’ comment is HOLLOW.

[guillazo]

Oh! here is my (late) rejoinder. You have answers, you have Kontradictions, you have one of the most older fallacies of all times in history of economics, and much more. Again thanks for the comments guys

[skylien]

Guillermo,

Wow, your blog posts are really top-notch!

[Smiling_Dave]

Keep 'em coming, Guille. Top notch.

[Minarchist]

@Smiling Dave

Of course, to explain everything based on a low interest rate, one has to have a definition of “low”. And their definition was “lower than it should be”. Which of course requires a new definition of what an interest rate “should be”. The easy way, that avoids all attacks from Saffra and Lord Keynes and everyone else, is to say “whatever it would have been had the central bank not printed all that money”.

So that we have no need of finding out what the “real” rate is. Suffice to say that it is certainly higher than the one that comes into being after mountains of money printing, and that’s enough to explain the ABCT.

They are saying that depending on the givens of a particular case, Jaguar or jalopy, you get a different number, and thus there is no one unique number at all. And the rebuttal is that there is a unique number for a given particular situation. [Even though it may be impossible to actually calculate, it’s there]. And that number is, given a specific banker and a specific given person on a specific day and all the specific details of the specific loan, the rate that would have been set by that specific banker if there was no central bank printing money.

Indeed. That’s always been my understanding: that the “natural rate of interest” is merely whatever the rate (or rates - makes no difference) would be absent changes in the money supply. The rate will tend to be lower given a monetary expansion than it would have been absent that monetary expansion, thus changing the way in which resources are allocated relative how they would have been allocated absent the monetary expansion. And so of course the natural rate of interest cannot be identified in cases of changes in the money supply, since it’s a counterfactual - i.e. it didn’t exist by definition. And in cases where there is no change in the money supply, the natural rate of interest is the actual rate of interest.