Its great that Student is aware of and can introduce us to examples where the mainstream (or some in it!) are taking on Austrian insights and adopting them into their framework. It is heartening; and its also a nice feeling to know we were here first 
1. The interest rate is the marginal product of capital (at equilibrium)
Can someone please tell me if I properly understand why AE disagrees with this neoclassical position? Do I have rocks in my head?
Hereâs my thinking: the natural âinterest rateâ is simply the current price of loanable funds settled at on a free market by the lenders and borrowers. Now, suppose Iâm an entrepeneur and I can loan $100 to someone in return for $100+$X interest a year from now - i.e. the interest rate is X%. Or, I can spend $100 on a machine that generates goods worth $Y (the marginal product of capital) and results in a worn-out machine worth about $50 a year from now.
Because of arbitrage, the values of 100+X and 50+Y should converge. Say, X is equal to 10. Then Y must be 60. Clearly the interest rate (10%) is much lower than the marginal product of the machine (60%).
If the statement were âThe interest rate is the marginal product of capital, minus depreciationâ then maybe it would be better?
The thing that neoclassicalâs (for lack of a better term) seem to have a hard time understanding is that inflation may not (usually does not) affect all prices by the same degree or even in the same direction. The price of some economic goods will not rise as fast as the rate of monetary expansion, and the price of other economic goods may actually fall. This is what causes structural imbalances, and why Austrians stress that inflation is a micro economic phenomenon. Additionally, the concept of velocity is entirely barren: money is never truly exchanged for itself; it cannot be measured and it is definitely not constant.
esuric,
some prices may fall? i must say i never heard that one before. i have heard of some prices rising more slowly than other prices leading to a relative decline. but thats kinda different.
and i need some help making the leap from this discussion back to the quantity theory.
also, how would you respond to the fact that austrian economists like hayek and pb both seem to accept the quantity theory? are you sure your views represent ae as a whole?
like i said it would be really helpful if you come up with specific examples and quotes to make contrasts clearer.
You know student, not every comment is directed at you.
Mises writes about this extensively in his Theory of Money and Credit. I highly recommend it. The explanation is rather lengthy and I donât really have the time or patience to fully explain it here.
All Austrians accept the quantity theory, but they reject the mechanical view of the quantity theory, represented by Fisherâs equation of exchange.
- There is no 1-1 direct causal connection between changes in the supply of money and changes in the price level.
- âThe velocity of moneyâ is âa meaningless concept taken from quantum mechanics.â You cannot aggregate the desire to increase or decrease cash balances (or subjective valuations in general). Money is never exchanged with itself.
- Causation cannot be established in the equation because there are no qualitative constants (velocity) in human action.
- The variables (money stock, velocity, quantity of goods, and the price level itself) cannot be unambiguously defined.
- It ignores the element of time.
Misesâ critique of the Mechanical quantity theory is actually an extension of Wicksellâs critique (Interest and Prices, Chapters 5 and 6).
I purposely made it a list. The amount of time needed to adequately explain each position would take forever. There are entire volumes dedicated to each specific point. For example, I realize that many neoclassical economists, in addition to the marginal productivity of capital, also incorporate time preference into their theory of interest (Fisher). But the fact of the matter is that all neoclassical economists believe that the marginal productivity of capital plays a central role.
so all austrians accept the the quantityâŚexcept that is composed of âmeaninglessâ concept or concepts that cannot be definedâŚ
and of course this position is held by all austriansâŚexcept hayek and pbâŚwho you still have not addressedâŚ
You seem to be confused. The quantity theory is not MV=PQ(T). The quantity theory goes back to at least Copernicus and probably further. It simply states that money is subjectively valued like all other goods, and that changes in the supply of money affect prices (In contract to Tookeâs purely endogenous view of money, and the Cost-of-Production/Mercantilist view of money as something with intrinsic value to which all other goods are compared to). Thus, the Austrians do not object to the quantity theory, but they do object to the mechanistic version developed first by Hume and then by Fisher, and ultimately by Friedman.
Hayek objects to the mechanical version of the quantity theory (See Monetary Theory and the Trade Cycle).
i am confused. please explain the differences to me between the âmechanistic viewâ as you concieve against the austrian view. please provide quotes from austrian economists to support that characterization.
and actual quotes would be helpful. references to entire books might be useful for future reading, but more difficult for advancing the discussing.
Is Esuric an encyclopedia or a library?
Theorizing about how costs associated with inflation can affect long term growth is hardly the same as claiming that money is not neutral in the long run, which most of these papers suggest.
Regardless, you canât seriously compare the level and degree of theoretical work between the two. Come on⌠you mention some papers here and there that just begin to touch on the issue, while non-neutrality is one of the basic tenets of Austrian capital and monetary theory.
I just didâŚ
Iâll give you one. Iâm too lazy to quote mine and I donât have my notes on me (my computer is being repaired).
http://mises.org/humanaction/chap17sec3.asp
âThe insight that the exchange ratio between money on the one [p. 405] hand and the vendible commodities and services on the other is determined, in the same way as the mutual exchange ration between the various vendible goods, by demand and supply was the essence of the quantity theory of money. This theory is essentially an application of the general theory of supply and demand to the special instance of money. Its merit was the endeavor to explain the determination of moneyâs purchasing power by resorting to the same reasoning which is employed for the explanation of all other exchange ratios. Its shortcoming was that it resorted to a holistic interpretation. It looked at the total supply of money in the Volkswirtschaft and not at the actions of the individual men and firms. An outgrowth of this erroneous point of view was the idea that there prevails a proportionality in the changes of theâtotalâquantity of money and of money prices.â
chloe,
i went out of my way to provide quotes to support my assertions. i thought it was useful for advancing discussion. it at least illustrates iâm talking out of my ass.
Both Mises and Hayek consider the quantity theory a great achievement, but only when considering what existed prior to its adaption. All is relative.
They absolutely reject the literate mechanistic interpretation of it.
Esuric,
and your previous explaination doesnât make sense to me.
and your quote from wicksell seems totally unrelated to your argument. you were talking about relative price movements and the âmicroeconomics of inflationâ, heâs talking about how velocity isnât constant (heâs right it isnât, but who ever said it had to be).
if your argument amounts to the fact that some people somewhere disliked the quantity theory for some reason then i agree.
but nothing youâve said convinces me that it is a tenant of ae to reject the quantity theory (mechanist version, however you are defining it, or otherwise).
ps* that isnât to say it isnât a fact. not being an austrian, i canât really say. iâm just noting that esuric thus far has not done a great job of making the case. if my insistance on sources and clear explainations results in him making better arguments and me getting a better understanding of the austrian position, then i will consider the effort a success.
It doesnât make sense to you because youâre not paying attention. Stop trying to âbeat meâ and listen to what Iâm saying.
The Austrians do not reject the quantity theory of money, which simply says that the value of money, like all economic goods, is subjectively determined by demand and supply conditions. That is, Austrians reject that total employment determines the price level, or that the price level determines the total supply of money (a purely endogenous view), or that money has âintrinsic valueâ (Marxian, Mercantilist, and Cost-of-production view).
What they do reject, on the other hand, is the literal or mechanistic interpretation of the quantity theory of money, as expressed by Hume and Fisher (MV=PQ(T)). Now why do they reject this?
- There is no 1-1 direct causal connection between changes in the supply of money and changes in the price level.
- You cannot aggregate the desire to increase or decrease cash balances (or subjective valuations in general). Money is never exchanged with itself.
- Causation cannot be established in the equation because there are no qualitative constants (velocity) in human action.
- The variables (money stock, velocity, quantity of goods, and the price level itself) cannot be unambiguously defined.
- It ignores the element of time.
Simply put, it ignores human action.
No, he entirely refutes the concept altogether (Mises does as well). Should I quote the entire chapter? Will that make you happy?
esuric,
it isnât about âtrying to beat youâ its about trying to get a straight answer out of you. i just want to know why you say that austrians economics requires a rejection of the quantity theory. first you focus on relative price motives and the microeconomics of inflation, when pushed for more explaination and sources you cite wicksell speaking on a totally different topic.
now youâre simply reposting a list of grievences which were not clear the first time. for example you talk about how velocity is meaningless because it canât be aggregated (i guess thatâs what youâre saying), but velocity can actually be calculated for an individual level if you really wanted to (bryan caplan talks about doing it in his classroom here: http://econlog.econlib.org/archives/2009/11/what_is_money_v.html). so i am not sure how that complaint registers for velocity specifically. and âmoney is never exchanged with itselfâ? i donât know exactly what that means in relation to the quantity theory. i just donât see the connection.
and of course this list seems to totally exclude your first argument, which was that the quantity theory ignores the âmicroecnomics of inflationâ. does that mean this argument is less important or maybe less accepted by austrian economists? or maybe its just implicit in the other items on the list??
do you see how this might be unclear to someone?? surely you donât think iâm busting your balls for fun.
now it looks like youâre getting a little heated and i really donât do heated. i do chilled with a lime twist. so if you want to sleep on it and talk later thats cool.
just a note, you saying i was trying to beat you made me feel bad. so i figure i can dilute the bad mood by saying i think youâre one of the better econ posters on the board. and i wouldnât bother busting your balls on specifics if i didnât think you couldnât provide them. hereâs my philophy on debates (spoken with the âmost interesting man in the worldâ voice): âi donât always debate, but when i do, i debate the argument and the not the person.â
This comment was not directed at you:
It was a general observation about neoclassical economists, and there are other neoclassicals on this forum. This is why, along with the heterogeneity of capital and the time-structure of production, the vast majority of Neoclassical economists do not understand the Austrian theory of cycles.
I guess you thought this comment was a response to you, and you sought clarification on why Austrians reject the mechanical view (which you conflated with the quantity theory in general). I have answered your question; Iâm not going to repost my âlist of grievances.â
Re-read the Wicksell quote, and then read this: http://mises.org/daily/918. It basically says what I said but gives you the level of detail you demand (maybe). If you find it unconvincing then you find it unconvincing. What more can I do for you? At the very least, you are now aware of a major difference between the mainstream and the Austrian school.
esuric,
i actually found that mises daily article while googling for links related to your opinion and i think the author fundamentally misunderstands the concept of velocity. he keeps focusing on the common analogy of velocity as âturnoverâ (which i am guessing where your confusion that the concept was borrowed from physics comes in).
but, as bryan caplan notes, velocity is just the inverse of the percentage of income one decides to hold as money. and this is certainly a concept that can be defined independently (bryan caplan notes that he even asks his students to calculate their personal âvelocitiesâ). when we are talking about velocity we are talking about money demand.
and this isnât an intepretation peculiar to caplan. for example, you can find brad delong using velocity as money demand stand in in his âsimple keynesianism for monetaristsâ essay:
http://delong.typepad.com/sdj/2009/04/delong-simple-keynesianism-for-monetarists-a-primer.html
so i am still not sure your âlist of grievencesâ make much sense. and to the extent that they represent the views of some austrians (whether you argument is a required characteristic of being austrian isnt clear to meâpeter boettke didnât seem to voice these complaints, you claim hayek did and i will have to look into it later), i figure it mostly represents a fundamental misunderstanding of the quantity theory. but weâve apparently come to an impasse so i guess weâll just have to agree to disagree.