Haha I lied again. I said I wasn’t going to continue, but I think I see one major problem. You don’t see why lower interest rates might imply an economy with more capital. So lets forget about “roundaboutness” for a second and consider that question.
I think we both agree that Austrains would argued that if the interest rate falls, investment will increase. Why? Because the marginal benefit of an investment is its rate of return and the marginal cost of an investment is the interest rate (defined as the amount the entrepreneur must pay for the borrowed funds used to under take the investment). When you reduce the interest rate, you are essentially reducing the marginal cost of investment so other things being equal he will invest more. Agreed?
So if you have two seperate countries, but one has a lower interest rate than the other, then the country with the lower interest rate will be investing more (assuming they are identical in every other way). Agreed?
But what is investment? Well, from the entrepreneurs perspective, it is the purchase of goods that are not used for consumption but for future production. Stuff like factories, computers, etc. In other words, they purchase capital. Agreed?
So, by saying one country invests more than another, we are saying that it is accumulating capital more quickly. Agreed?
If we can agree on all these points, I am not sure how you could argue that we would not expect the country with greater investment to have a greater capital stock, holding everything else equal.
For example, say you have two countries (1 and 2) that have been identical in every way until this year. That means thier existing capital stocks are exactly the same. But this year, the folks in country 1 decided to consume less and save more. The interest rate falls right? That means the folk in country 1 will now be investing more than the folks in country 2. Essentially, they will be adding more to their capital stock than the folks in country 2. And as a result, at the end of this year, the folks in country 1 will have more capital than the folks in country 2.
And this is not just a consequence of Austrian economics. In fact, this is how economics is still taught in the mainstream. Check out Barro’s Macroeconomics Textbook. Barro describes investment in exactly this way.
So if the Austrians are wrong on this point, so is almost everyone else. And technically, I believe everyone is probably wrong on this point. In the context of Samuelson’s comments, he later retracted those remarks because of the implications of “reswitching”. For a description of what “reswitching” is and how it might threaten the Austrian conception of capital accumulation and roundaboutness, I suggest you read this article.
“Reflection on Reswitching and Roundaboutness” by Roger Garrison
http://www.auburn.edu/~garriro/garrison.pdf
In this article, Garrison directly discusses the Samuelson example being quoted and tries to explain why we don’t need to worry about reswitching (I would give you CliffNotes but I am at work). You will also see that everything Garrison says is completely consistent with my story about how Austrian theory should imply that lower interest rates imply greater “roundaboutness” and greater capital accumulation.
PS* I should note the argument that reswitching probably invalidates the simple story of capital accumulation presented here is not a big secret. And for a while in the 1960s it was a point of great debate.
http://en.wikipedia.org/wiki/Cambridge_capital_controversy
But, capital theory does not play a huge role in modern macroeconomics, so the problem has basically been ignored.
In this article
Krugman says he does not take Austrian ideas of business cycles seriously enough to comment on them.
I guess the fact that he goes as far as he does is a sign that he has already taken more effort than he is willing.
Mr. Catalan, I don’t Dr. Krugman has much to worry about his reputation. It is high enough as it is, and he is in the safety of government approval. About the most concession he has probably ever made is towards the giant Milton Friedman, but other than that, I don’t think he sees the others big enough to comment on.
I think a more enthusiastic man who’d be willing to defend Keynesian critiques from opponents would be Stiglitz, who has a pretty strong opposition to “market fundamentalism”. A debate between him and an Austrian would be interesting.
Krugman makes a lot of assertions in that article that he states Austrians have no answers for. Anyone care to find some articles that refute what he says they have no answers for?
Well, we don’t know the answer to the question of how many pennies are on seabeds.
There was an interesting discussion of what makes ABCT distinctively Austrian recently. See espacially Pietro’s comments. In the end they settled on capital theory.
I see what you mean now. I hadn’t taken into account capital accumulation. Why do you believe that the idea that countries with lower interest rates do not have more capital than countries with higher interest rates? Let’s assume a free-market in both countries (that is, there is no “dead capital” in existance). By the way, I bought Contra Keynes and Cambridge mostly to read Piero Sraffa’s critique of Hayek’s Prices and Production.
If you believe that capital theory is not important in macroeconomics, then what is?
I guess spammers can be useful for something. This was a decent bump.