Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he’s in favor of it. That’s kinda…weird…for someone who really knows what he’s talking about.
Elaborate.
He certainly is well versed, although I’m sure he admits there is still alot to learn and understand. Perhaps he has reevaluated his position regarding FRB. If this is the case, I am interested in his reasoning.
I read some of Boettke’s articles regarding FRB and he often refers to a “natural rate of interest” that is different than the market rate. As in, in times of increased demand to hold money, the market rate will change relative to the “natural rate” and this is sub-optimal. Perhaps Giles can elaborate, if he is familiar with Boettke’s position.
What is the natural rate of interest, how can it be known to differ with the “market” rate, and what are the implications of allowing the market rate to differ from the “natural” rate?
I am far from convinced that FRB and monetary policy can “fix” the market, but I don’t want to dismiss it out of hand.
I don’t get it; why should we give up on capital theory?
The natural rate of interest: The rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, meaning without the distorting affects of fluctuations in the purchasing power of money.
The market or money rate of interest: The rate of interest that is demanded and paid for loans in money or money substitutes, or the rate at which the banks lend.
The diversion of the market rate of interest to that of the natural rate is what causes the business cycle, the booms and the busts. When the banks create fiduciary media (know what this means), through credit expansion, they necessarily lower the market rate below the natural rate. Even if the market rate does not change, the natural rate has, it increased (since creating fiduciary media presupposes lowering the market rate below the natural rate). This allows firms to engage in a more lengthening capital accumulation process, and allows investment ventures which are not truly profitable to appear profitable. For example, if your expected rate of return was 4%, but the rate of interest was 5%, you could not open your business, unless you enjoy making losses. But if the market rate was suppressed, arbitrarily so, to 3%, your project now seems profitable. But the people do not really want your business, they have not actually chosen to differ consumption (save) as to warrant the entry of your company onto the market. This diverts labor and capital away from actual sustainable activities into unsustainable ones, and bids labor away from lower order goods to higher order ones (from producing immediate consumption goods to future production goods). This also increases competition for laborers which results into inflated wage prices, which are made rigid through union contracts. When the bust comes (when the market rate returns to the natural rate) those who are unnaturally employed must see a reduction in their wages or unemployment. The market rate must eventually return to the natural rate, no matter what; this process can be delayed but never stopped. We can’t know what the natural rate is, or at least right now we can’t know.
(Third attempt at writing this post).
I suppose you are talking about Leeson’s blog post, in which case, let’s put things in context.
From what I know of Leeson a lot of his work is aimed at marketing Austrianism to the mainstream. Given this, work on capital theory just is not the way to go. Whilst some understanding of capital is necessary to understand Austrian economics, tackling the thorny issues of capital theory is not going to advance Austrianism hugely. Especially considering the difficulty of the subject at hand, many Austrians have attempted work on capital theory only to give up. This includes such great minds as Hayek, from what I understand the return on investment with work on capital theory is very low.
Now, this said, I disagree with Leeson, but I can see where he’s coming from. If anybody is going to attempt work on capital theory, they should be very aware of the difficulties involved.
(As a side note, he makes some superb points in that blog entry.).
I’d consider myself reasonably knowledgable about economic science, but not particularly so. No more than I could expect to be given that I’ve only been interested in the subject for a year now.
As regards FRB, I’m certainly not sold on either position. But I do think that a lot of the arguments in favour of free banking have their merits. To clarify, I’ve been drifting towards the position held by Mises for some time now, I don’t think that the arguments against the legitimacy of FRB are very strong. As Selgin has pointed out, the conclusions entailed by legal arguments against fractional reserves would probably preclude such financial instruments such as callable loans. Instruments that are very important in modern economies. I feel a good way to truly understand an argument is to argue in favour of it and see how well it holds up, I’ve been on the other side of this argument for some time now and I’ve read a lot of the literature that arguments fractional reserve banking leads to economically inefficient outcomes and/or is illegitimate. It may well be that in a few weeks I’ll read a piece that makes me change my opinion again in favour of 100% reserve banking. In the meantime I wish to familiarize myself with the work of Selgin, White and Horwitz on the subject.
I’m not really familiar with Boettke’s position, but I assume it’s similar to that of Garrison, Horwitz, Selgin, White et al, if so I’ll attempt to give a rough sketch of it. If you wish to know more (as I do), read the authors that I’ve just mentioned, especially White and Selgin.
The argument is that Rothbard, de Soto and other supporters of 100% reserves ignore the demand side in the market for loanable funds. For example, if there were a sudden rise in the demand for money balances, this would, ceteris paribus, cause the cost of money on the market for loanable funds to increase. From this there would be two results, the first is that this would cause entrepreneurs to revise their provision of goods and services in favour of less roundabout methods of production. IOW, malinvestment would occur. The second result would be that as prices adjusted downwards, due to various rigidities there would be a relative price structure that is out of line with consumer preferences. Meaning that there would be both intertemporal (due to the interest rate) and intratemporal (due to price rigidities) malinvestment.
The mechanism by which this occurs is roughly as follows: as people demand more money they take loans and stop spending as much on goods. The former would put an upward pressure on the price for money in the loanable funds market, whereas the latter would put a downwards pressure on the same price because banks would have more deposits with which they could create credit. To put it another way, where I spelled out the consequences of an increase in the money supply due to an increase in the demand for money, under the assumption that all things are equal, free banking wishes to ensure that the ceteris aren’t paribus.
The paper that changed my mind was this one, give it a read and tell me what you think.
I attempted to spell out the consequences above, but I suppose the short answer to your question is that it is always known that the market rate differs from the natural rate, as a result of Austrian methodology. But, the key issue is the extent to which the natural rate differs from the market rate. The crux of ABCT is that if significantly differs from the natural rate in the downwards direction.
Thanks for that, I’ll give it a read, seems very interesting.
That seems reasonable. And I’d agree that to some extent frustration on the behalf of Austrians is warranted. Austrians certainly do have an uphill battle in front on them. In spite of this, I feel that it is not so difficult as Austrians make out. Austrians have and do publish in top, mainstream, journals (AER and QJE included). The bigger point is, however, that “angry rhetoric” will get Austrians nowhere. Austrian economics is already labelled as “unscientific” such emotional outbursts will get us nowhere.
So it’s wrong to admit when you think you’re wrong or when you think someone brings up another point worth looking at? This is my main problem with what seems to be acceptable at the Mises Institute - not searching for the truth, but rather believing you’ve already found it and shutting yourself off to debates from outside perspectives. I’ve seen a lot of outsiders come here looking to make some conversation and simply get blown by as though they weren’t worth your time.
I don’t mean to sound hostile, but I think that’s just wrong.
Forum =/= Mises Institute, FYI.
Ok. Yes, fair enough