Not even in a perfect world where there is absolute economic freedom, will the market rate always equal the natural rate. No one ever says this ever, not Wicksell, nor Hayek, nor Mises. Do you know what the market rate is, and why it exists?
I just asked if you would explain it to me.
The natural rate of interest is the interest earned on capital due to time preference which is equalized throughout the economy via arbitrage. It is also represented by the rate at which real capital goods would be exchanged in a theoretical barter economy. This rate directs and allocates scarce goods through time towards warranted economic activities—that is, it dictates the remoteness of capitalistic production. The introduction of money makes it so that real capital goods are never exchanged, but rather are bought and sold. That is, banks don’t give you machinery, intermediary goods or whatever, but rather lend you money which you use to buy capital goods. The banks, then, control the supply of money via credit expansion and therefore control the market rate of interest, but not the natural rate which is an independent economic phenomenon. The market rate, in a free system, will fluctuate around the natural rate, which is continuously shifting because of real changes in the economy (according to Wicksell). For Wicksell, long-term disturbances are the result of interventionist policies from central banks and the treasury. Mises expands upon this point, and makes it clear that banks can suppress the market rate below the natural rate even without third party monetary interference (but never says it’s assured–at least not in TMC).
I provided the argument against this. I resorted to Mises because you respect him more then a “user” on the other side. Did you see the response to this?
Has Hayek ever talked about any such problems in the absence of government intervention? That is, when you’re already dealing with the contraction that results from the previous expansion.
I’m sorry but as far as monetary theory, I can’t see how Rothbard departed form Mises in any way. And as far as Capital Theory, I also don’t see how he departed from Mises and Hayek. I think I’m familiar with most of Rothbard’s work and I just don’t get this “Rothbardian” nonesense, except for his elaboration on the mechanics of banking.
I have to look it up again to see what you are talking about.
By deflation, do you mean when money goods increase in value? How is that bad?
Market rate of what? Natural rate of what? What is a ‘natural’ rate?
All you need is a bank to issue fiduciary media. You don’t need a central bank.
And there is more to Mises then TMC. The man grew you know. and his theory was refined over the years. Human Action is much more refined.
Yes, read my response above. Hayek clearly states, in lecture four, that during periods of crises (which according to Hayek are unavoidable) there may be a contraction in the supply of money to the point where the market rate rises above the natural rate and causes additional contractions. In such conditions, monetary expansion is justified to the point where it doesn’t exceed the demand for money, and therefore prevent the necessary liquidation. Furthermore, in Monetary Nationalism and International Stability, Hayek explicitly states that the goal is “to prevent the credit superstructure from running away in either direction.” Bad deflation exists for Hayek, and I have to re-read part three in TMC because I was so biased the first time around. In fact, I’m going to do this right now.
You didn’t address my point about Bohm-Bawerk. You gave me some meaningless quote about misdirections brought about by arbitrary reductions in the market rate with respect to the natural rate, and assumed that this is caused by monetary expansion (as opposed to monetary expansion which exceeds the demand for cash holdings).
Okay.
Right. Thanks for the reply. It is what I thought it was. The distinction is based upon the state banking system, not based on a free market scenario. There may be arbitrage between the two rates in the free market, but that is strictly a knowledge problem which can be resolved by having more efficient markets (better at communicating information, and thus reducing arbitrage opportunities).
If one cannot imagine a system without fiat or banks as a possible outcome of free competition, then I would say their work is conducted with a very narrow, and possibly anachronistic focus.
If prices fall faster then costs you have a problem.
Of interest. Read.
How would that happen? In the aggregate I mean, which is what I assume you are talking about.
The banking system is based on fractional reserves, and it’s been this way since the Medici’s. It remained this way in Scotland until Peels act in 1844, and it exists today with extreme regulation and interference. I don’t know what the free bankers are talking about when they say that fiat money is imaginable. This doesn’t make any sense to me, and I can’t find any support for it in either Hayek or Mises’ work. There would have to be an international commodity standard to assure gold flows if free banking has any hope of success. I have a lot of problems with the free bankers because they sound like a generation raised on monetarism instead of Austrian economics, but I’m not willing to throw away monetary equilibrium theory for no good reason.
There’s a demand for money as money, and there’s a demand for money as capital. If the supply of money falls below the demand for cash holdings, then actors will begin to increase supply and limit purchases, pushing prices down faster than they otherwise would have. Now, this is called the Wicksellian rot which the Keynesians like to mention, but it assumes a perpetual spiral, which is absurd. Price will adjust and bring about equilibrium, but it causes problems.
I have no idea what this appeal to history is about. Seriously. I know people care a lot about this topic, but I’m really not one of them.
If you did, would anyone notice? Honest question.
Thanks. I’m sure I’m not the only one. If you don’t care, then don’t get involved. People come here to discuss economics and political theory, and those who don’t agree with Rothbard on this position have to absorb a whole lot of bullshit. It creates an anti-intellectual environment which biases those who venture into AE.
So the “natural” rate would be the rate of a 100% reserve (FRB-less) free market (where all money is backed by actual capital/assets) whereas the “market” rate would be the rate produced by the FRB fraud prevalent in the system. The booms/busts caused by the FRB’s manipulation of this quantity would result in the fluctuation of the market rate versus the natural rate. Simple, really. Without FRB, all rates are natural so there’s no need for anyone (central planner or free market agents) to “chase” them or to fluctuate around them.
Z.
Okay, thank you for this.
It really seems that way for you doesn’t it?
The logical conclusion from faulty premises.
Well it seems to be based on this,
I don’t buy into money as capital. I don’t think this is a characteristic of money, I think this is a characteristic of money in a particular banking or monetary regime. Which is probably why the monetarist-esque coordinated problemators seem to base their work around it. They really appear to only treat money in the state paradigm, not as something coming from the market.
Anyway, thanks for humouring me. I hate this topic with a passion so I will bow out.
Indeed, it’s not. Mises in TMC showed that Bohm-Bawerk was wrong in labeling money part of “social capital.” But, at the same time, money is demanded as capital in monetary economies–but this doesn’t mean that it actually is capital.
Yes but we were talking about free markets. You asked about the interest rate being above the natural rate in the context of free markets, implying that a deflationary process that results from people holding cash may cause the interest rate to rise above the natural rate. Did I misunderstand you? Go over that thread again.
Everything in that paragraph you provided has to do with government intervention. Nothing about the free market. Isn’t that correct? So how can this be used to support anything that has to do with free banking or monetary equilibrium theory?
The Milton Friedman type arguments about what the Fed should have done are meaningless to me. If Hayek occasionally expressed an opinion on the most optimal monetary policy to mitigate the damage already created by monetary policy, fine. In most of his main writings, he supported the natural unwinding of credit and strongly opposed any further attempt to inflate.
But so what? This has nothing to do with a free banking system.
Read it again. Hayek is saying that the only way to avoid a crisis is if every fiduciary media created was actually saved by its recipients. This is of course impossible. In other words, all loans must be backed by real savings.
I haven’t read Bohm-Bawerk so I don’t know what he said. I was relying on what I thought you were alluding to.
I know, I have received the same when going against Rothbard on political theory. So I am sympathetic.
That said, my question was honest. Is this a narrow and obscure theory that does nothing more than provide topics for publication, or if it ceased to be discussed or studied, would the world even notice? I know it is important to the problematic coordinators, but like a lot of theory, doesn’t seem to be particularly useful or relevant to anyone outside the business of creating material for publication in economic journals.
I don’t need a response, I am done with this. Just wanted you to know, I wasn’t trolling you. The question when asked was genuine.