miércoles, 30 de enero de 2013

Sraffallacies: A Misesian Defense of ABCT (II)

Mortal Kombat VS Screen Image source for the two blog-parts: 
Ok, I'm back in another lengthy post ending this issue (for now). In Part I we saw how Mises’ writings can be used to destroy Sraffa’s criticism of Hayek’s development of ABCT. Let’s continue this Mortal Kombat style post with some complementary issues.

Was Sraffa even right?

1. Hazlitt refutation

According to Hazlitt, Keynes’s “own rates” (based on Sraffa’s critique of Hayek) theory is false: He calls interest to the margin of a purchasing-selling transaction and from that transaction you obtain a profit (not an interest!) because you knew better than others when buy and at what time sell. It is what is obtained by “speculative anticipations of price changes”. But interest is obtained because of lending-borrowing transaction, someone lend money and pact to receive an interest payment in a future date, and some other borrow. Note that somebody is creditor and somebody is debtor. But in a purchase-selling transaction nobody lend what he sells and nobody borrows what he has purchased! The margin in a buying-selling transaction is profit, not interest. This is just a very short and bad explanation of Hazlitt insightful critique, in order to understand his argument see Hazlitt, Henry. The Failure of the "New Economics" (1959) pages 236-252. Also important is Frank Fetter’s development of the theory of time preference and the important comments of Jeffrey Herbener. Herbener's bibliography and audio/video conferences make important contributions to understand interest theory. For example in this video starting at minute 10:00 he makes important comments on “Temporal Value” (temporal use or placement), forward-spot prices, futures markets and “Intertemporal Value”, money, insolation of time preference element, natural rate, etc. They are very useful in a more profound critique of Sraffa’s concept.

2. Conard’s analysis

Conard in Introduction to the Theory of Interest (1959) chapter VIII gives an example of three goods (money, food and clothes) and three supposed “different” rates (4%, -20%, 30%) and he says:
"The first point to note is that in the most fundamental sense this illustration does not reveal three rates of interest, but rather three ways of describing a single rate of interestThe issue is not what one borrows or lends, but rather by what measuring stick one evaluates the result of borrowing or lending… Thus the difference in own-rates, which will normally exist even in full equilibrium, does not represent fundamentally different rates on the different assets, but arises instead from the fact that these rates are all measured in different standards one from another." (Italics and bold added)
The important issue is that, even in equilibrium, it is not true that there are different interest rates, but there are different standards to measure the same interest rate.
His conclusion is:
"(1) With given and uniform expectations the rates of interest on different commodities are identical in equilibrium, provided only that they be measured by the same standard. (2) Differences in own-rates may well exist, even in equilibrium, but these differences arise, not because the rate on X differs from the rate on Y, but only from the fact that own rates measure the rate on X by one standard (i.e., relative to X) and the rate on Y by another standard (i.e., relative to Y)."
Even in equilibrium, differences in rates arise not because there are different rates of interest, but due to the fact that the standard which we use to measure it might be different. It is the standard chosen what yields different results, not the rate of interest. With a further elaboration, this analysis could be also another refutation of the thesis of the italian. It is a very good chapter to understand the debate and the argument of Hayek's response to Sraffa.

 3. Cwik’s clarification and refutation
Paul Cwik (one of my favorite austrians alive today) has an incredible good paper defending Austrian theory of time preference from “inside” criticism. In “A Defense of the Traditional Austrian Theory of Interest” (2003) he defends the “traditional” theory from the attack of almost all other Austrians like Hülsmann, Reisman, etc. And also from Robert P. Murphy who has attacked austrian theory of time preference with a similar argument as Sraffa. He also makes and important contribution in clarifying that Böhm-Bawerk did not necessarily contradicted himself in accepting some productivity explanations on the determination of the real world rate of interest (which is different from the phenomenon of origin of interest alone):
“Murphy is being uncharitable and is attacking a straw man. Of course, when the assumption of ceteris paribus is relaxed, the interest rate is not a single and uniform rate. This is evidenced in the real world by the various structures of interest rates, e.g., the term structure of interest and the risk structure of interest. Murphy confuses the functionalist implications with the essentialist formulation of interest. The ERE is supposed to be an abstraction from the real world. The ERE is not designed to examine multiple structures of rates. Furthermore, the use of the simplifying assumption of a single interest rate does not disprove the traditional Austrian theory of interest… The formation of market interest rates is the result of the combination of the following: time-preference, the productivity of capital, changes in wealth, changes in expectations, the length of time to complete an investment project, risk of default, liquidity assessments, inflation, information costs, and institutional factors. Timepreference is endogenous to the action of individuals, while the other factors are exogenous and simply modify the market rate of interest… In a single interest rate market, all the exogenous factors are initially held constant…” (Italics and bold added)
 4. Lachmann’s refutation

He confronts the debate between Sraffa and Hayek directly in his books Capital and Its Structure (1956) pages 75-77 and in his 1986 article “Austrian Economics Under Fire: The Hayek-Sraffa Duel in Retrospect” included in the book Expectations and the Meaning of Institutions (1994). He developed an “overall equilibrium of interest rates” which is neither Sraffa’s nor Hayek’s type: “What Hayek should have said is not that there might be as many rates of interest as there are commodities all of which would be equilibrium rates, but that only some of them would be. While overall equilibrium requires equality of demand and supply in each single market, the latter is not a sufficient condition of the former.”

 5. Murphy’s refutation

Robert P. Murphy’s great paper “Multiple Interest Rates and Austrian Business Cycle Theory” (2010) takes the subject directly as Lachmann did. The enormous merit of this paper is that even if Sraffa was right, his critique does not refute ABCT. In other words he was able (after criticizes Lachmann’s solution) to ensure the validity of ABCT in Sraffa’s own terms (a multiple rates environment). ABCT is still valid even in the circumstances in which Sraffa said it would not be valid. He managed to do it using a Dynamic Equilibrium simple model. Maybe the best refutation is not to demonstrate that Sraffa was wrong, but to demonstrate that even if he was right, the theory still holds logically:
“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. Yet the basic Misesian analysis still holds true, that the bankers have suddenly augmented the purchasing power of one segment of the population, which not only redistributes real wealth but also leads to distorted money prices and more mistakes than otherwise would have occurred.” (Italics and bold added)
And even accepting Sraffa’s criticism and thesis, Murphy is very smart in acknowledge that Mises was perfectly aware that outside equilibrium there is not a unique rate:
“In its canonical form (e.g. Mises 1998 and Rothbard 2004), Austrian business cycle theory (ABCT) has focused on the distortions in the structure of production introduced by lowering “the” market rate of interest below “the” natural rate. To be sure, Mises and his followers are aware that in the real world, there are a multiplicity of interest rates, depending on the length of the loan and the perceived risk of default… Although Misesians acknowledge the fact that the real, or natural, or originary, rates of return could be different among different commodities in the real world, they typically ascribe these differences to uncertainty and entrepreneurial profit or loss." (Italics added)

A blogger criticisms

A blogger called “Lord Keynes” (nobody knows his real name, maybe it’s John Maynard’s spectre blogging from underworld to take revenge from austrians) is a famous post-keynesian commenter in libertarian-austrian blogosphere, forums and internet pages referring to austrians. He (she?) actually has a complete blog only to “refute” and attack every idea an austrian economist has ever had (he also writes about post-keynesian economics, philosophy and other things that are of no importance right now). Of course this is not a bad thing, a good theory or school must always be subject to attack in order to reinforce its soundness. He is not the only one post-keynesian internet blogger who criticizes austrians (Robert Vienneau for example is another), but he is certainly one of the most active. He also has a direct, rude and impolite style to communicate that I like but may bother other people, however I know perfectly that he is wrong a lot of times on what he says, and also his blog is a very good source of bibliography in some austrian subjects. After having flattered him too much, here comes the ugly job. 

Having declared the “victory” of Sraffa over Hayek, he has some other criticism of ABCT. Let’s see some.
After having no choice but to admit that Mises later on was not using the Wicksellian “natual rate of interest” theory, he says:
“But, as late as 1928 in Monetary Stabilization and Cyclical Policy, Mises is still using the Wicksellian natural interest rate:…To the extent that Mises’ presentation of ABCT in the Theory of Money and Credit and Monetary Stabilization and Cyclical Policy (1928) relies on the Wicksellian natural interest rate concept, it must be judged as worthless as Hayek’s Prices and Production.”
We have seen that Mises did use, but did not necessarily approved or was in agree with, Wicksell’s natural rate terminology. Later on, when he finally could, he developed his own theory very different from Wicksell's. However (following LK own argument) as the (post)keynesian he is, “Lord Keynes” does not mention the fact that Mises was not the only one whose theory relied on the wicksellian natural interest rate concept. Keynes himself confessed that he also relied on it on the same time (early 30s) that Sraffa accused Hayek of using that unique rate concept:
"In my Treatise on Money I defined what purported to be a unique rate of interest, which I called the natural rate of interest — namely, the rate of interest which, in the terminology of my Treatise, preserved equality between the rate of saving (as there defined) and the rate of investment. I believed this to be a development and clarification of Wicksell’s “natural rate of interest”, which was, according to him, the rate which would preserve the stability if some, not quite clearly specified, price-level…” “I am now no longer of the opinion that the concept of a “natural” rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis. It is merely the rate of interest which will preserve the status quo; and, in general, we have no predominant interest in the status quo as such." (Italics and bold added)[1]
As everybody knows, in the early 30s (and before that) Keynes was a wicksellian and a quantitative theorist:
"From his early book on Indian Currency (1913) to the Tract on Monetary Reform (1923), Keynes remained a Quantity Theorist in the Marshal1ian Cambridge tradition mainly concerned with questions of how to regulate the supply of money, how to stabilize the monetary liabilities of a fractional reserve banking system against inflows and outflows of international reserves, and how to structure the international monetary system so as to minimize such problems. Much of the Treatise on Money (1930) deals with these same problems. In fact, the Treatise as a whole is very much a work still recognizably in the Quantity Theory tradition, despite its emphasis on problems of the short run. Here, however, these older themes are left aside to focus on the novel ideas of the work: the first Keynes variation on Wicksell's theme." (Italics and bold added)[2]
"Keynes’s starting position in the late 1920s is harder to define, since his ideas were in flux. It is difficult to talk of a distinctive Keynes model, since he had not yet developed a theory of output. His two pre-Depression theoretical books can be read as explanations of the tendency for economies to experience deep price fluctuations, using the quantity theory of money as his analytic framework." (Italics and bold added)[3]
"Nevertheless Keynes allows that there is something in common between their conceptions – namely the Wicksellian/Marshallian theory of macroeconomic fluctuations as resulting from a discrepancy between the ‘natural’ and the ‘money’ rates of interest. Keynes accepts Hayek’s comment that he does not explain (amongst other things) ‘the factors which determine the natural rate of interest’ and agrees with Hayek that ‘a clear account of the factors determining the natural rate of interest ought to have a place in a completed Treatise on Money, and that it is lacking in mine . . .’ Note that at this point Keynes, evidently still thinking in terms of the model of the Treatise, has no difficulty with the concept of the natural rate… Did this discovery by Sraffa of a new concept of interest contribute to Keynes’s intellectual progress from the Treatise to the General Theory? His views on interest certainly altered soon after the Hayek interlude. We have noted that in late 1931, when responding to Hayek’s review of the Treatise, Keynes was apparently still quite comfortable with the traditional notion of the existence of a unique natural rate with which the money rate of interest needed to accord to ensure that savings passed to investment. Yet it is clear that within a year, at least by autumn 1932, when he resumed his university lectures, Keynes had formulated the essential, and fundamentally revolutionary, structure of the General Theory." (Italics and bold added)[4]
Why did “Lord Keynes” accuses Mises (or Hayek) of using Wicksell’s natural rate and did not say anything about Keynes who was using it too two years after Mises and at the same time that Sraffa was accusing Hayek of using that wicksellian concept? Has he the guts to refute his “master"’s Treatise and his previous books because he was using the wicksellian natural rate concept? Can LK write “Keynes's early theory is a complete nonsense because he relied on wicksellian theory of natural rate of interest” or “All Keynes’s pre-GT writings on monetary and interest theory are worthless because he relied on wicksellian natural rate”? I doubt it. But let’s assume LK admits it and says “yes, all what Keynes wrote before GT is garbage because he relied on Wicksell natural rate. But obviously later on he did not used that faulty concept.”, however he himself has confessed that Mises in his later treatments abandoned that concept too. So in order to be intelectually honest he must say that Mises-ABCT is as immune to Sraffa’s criticism as it is the monetary and interest theory of Keynes in GT (Of course, as demostrated above, originary interest is not Wicksell’s natural rate).

Actually we can very easily use his own accusation and his own words on Mises against Keynes himself: “But, as late as 1930 in A Treatise of Money, Keynes is still using the Wicksellian natural interest rate:…To the extent that Keynes’ theory in the A Treatise of Money (1930) relies on the Wicksellian natural interest rate concept, it must be judged as worthless."[5] 

The question is: Can someone raise such accusation in front of a keynesian? Of course not. Because immediately the keynesian would say: “But Keynes after in his GT abandoned Wicksell’s idea”, which is true. But the same true is valid for Mises in his later Human Action (a fact, I repeat, LK admitted!): His interest theory is not about a barter-equilibrium-unique in real world-rate. The fact that LK was unable (either by ignorance or deliberately) to use his own accusatory arguments against Keynes (who was also using wicksellian “natural” rate) demonstrates that his “critique” is arbitrary and totally invalid. He has an arbitrary and selective criterion which distorts this criticism and probably others.

LK also says:
"And Austrian business cycle theory (ABCT) also employs the Wicksellian concept of the natural rate of interest. With the invalidity of the concept clear, it follows that ABCT is also invalid."
This is a false statement as I demonstrated in Part I. But even if it were true, then: “Keynes' monetary theory in his most important book in 1930 also employs the wicksellian concept of the natural rate of interest. With the invalidity of the concept clear, it follows that Keynes’ monetary theory of early 30s is also invalid” Once again the arbitrary is present: Why, if Keynes was also using Wicksell’s natural rate, LK did not apply his criticism on his "master"? His arbitrary rule of “I attack austrians, but "forgetting" applying the same criterion on Keynes” must be obvious now. It is a question of basic logic: If ABCT is invalid because it uses Wicksell’s natural rate, then Keynes’s monetary and interest theory of 1930 and 20s is also invalid because it uses Wicksell’s natural rate. The fact of not saying anything about Keynes and attacking austrians demonstrate LK's arbitrary and selective criterion. Arbitrariness is not science at all. This is an evident example of double standard, coming from a guy who accused others of having a "double standard". 

Let’s see other examples: 
“I have recently seen this attempt to defend Mises’ early versions of ABCT, by invoking his later concept of the “evenly rotating economy”/stationary economy concept: But a reading of the earlier work of Mises in works cited above does not support this: (1) There is not one reference to the concept of the “evenly rotating economy” (ERE) in The Theory of Money and Credit(trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]). On pages 349–366 where Mises sets out his trade cycle theory, he uses the Wicksellian natural interest rate concept and Wicksellian monetary equilibrium analysis. (2) There is not one reference to the concept of the “evenly rotating economy” in Monetary Stabilization and Cyclical Policy (1928), and again Mises is still using the Wicksellian natural interest rate (p. 99ff.)."
Did you spot the fallacy? Let’s rewrite that “critique”: 

"I have recently seen this attempt to defend Keynes’ early versions of his theories based on Wicksell natural rate, by invoking his later concept of the “own-rate of interest”: But a reading of the earlier work of Keynes does not support this: (1) There is not one reference to the concept of the “own-rates of interest” neither in The Economic Concecuences of Peace (1919) nor in his Tract on Monetary Reform (1924) . As he has himself confessed, in his 1930 book, where he sets out his monetary theory, he uses the wicksellian natural interest rate concept and wicksellian monetary equilibrium analysis. (2) There is not one reference to the concept of the “own rate of interest” in The Treatise of Money (1930), and again Keynes is still using the Wicksellian natural interest rate."

Using his arbitrary criterion again over Keynes, I can demonstrate how ridicule is to accuse someone of had not written something he was only able to write on a later date. But of course for LK applying that criticism to Austrians is fine, but applying it to Keynes would be ridicule. 

And then he says:
"Yet ABCT requires a single natural rate of interest in the real world for the market/bank rate to coincide with, in order that we can avoid the cycle effects allegedly caused by ABCT."
False: a) ABCT does not require a single natural rate of interest in the real world. b) ABCT does not require the market/bank rate to coincide with it. 

About Mises’s “originary” interest rate he says:
"But this is really just another real theory of the interest rate where loans are imagined as occurring in natura, or in real commodities in an economy at full employment. Mises is still subject to Sraffa’s critique of Hayek."
This is not true at all. The “real factors” in Mises theory are not real commodities, but are subjective valuations in different points of time (ceteris paribus) in a money economy. It is based in ordering ends to be attained in different points of time. As well as marginal utility theory is based on ordering ends, not goods. In the sacks of grain example of hm-Bawerk, the person is not ordering sacks of grain (all sacks are equal) but the ends he can attain with more or less sacks. Even the quote he uses to affirm that false statement demonstrates it: “Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself..." (Italics added)

"Lord Keynes" also makes a recount of “different versions” of the ABCT. Is it bad to have different “versions” of a theory which was developed by different people and which is more than 100 years old? Not at all. And about the "versions" he says:
"They assume a single real natural rate that does not exist in a growing, money-using economy, as Sraffa showed (1932a and 1932b). The natural rate is one that would obtain, as if loans were made in natura (that is, in real commodities). But in a barter economy not in equilibrium, there could be as many natural rates as there as commodities."
False: A “growing, money-using economy” is a changing economy and actually, if there is money, it must be a changing economy (in ERE there is no demand for money and it is just a numerarie as Mises has shown). It has been demonstrated that in a changing monetary economy there is no-unique, no-single, no-barter rate either of originary or gross market interest. After this comes:
“(2) In Hayek’s version of ABCT in Prices and Production(London, 1931) he argued that policy should attempt to make money neutral (although by 1933 he was questioning whether monetary policy could ever approach the situation of “neutral money” [Hayek 1933: 159-162]). But money can never be made neutral, and a state in which money is neutral is nothing but a state in which money does not exist."
It is an undeniable fact that Mises did not under any circumstance looked for a “neutral money” ever, the whole concept is contradictory. The ABCT does not look for either a “neutral money” or a “policy to target any natural rate”. The very foundation of the theory is the non-neutrality of money, the theory needs the non-neutral effect of money in order to be true. I'm sure LK will try to answer “Don’t be an idiot! I’m referring to (Sraffa’s interpretation of)Hayek’s version of ABCT in that sentence!” But “Hayek’s version”, is not THE whole ABCT, so LK could not have claimed in other place “With the invalidity of the concept clear, it follows that ABCT is also invalid”. He said that ABCT is invalid, not that Hayek's version of ABCT is invalid.

The accusation of “assuming full employment” has been refuted so many times by so many austrians that I can’t believe I’m dedicating space here for it. But there is something interesting: After been obligated to accept the obvious fact that Mises in 1928 (yes! before Keynes’s General Theory!) was writing about and even assuming unemployment, all that LK can do is to deny scarcity!!!
"Mises still fails to address the issue of what would happen had the factor inputs or consumer goods not been scarce."
As well as socialists and technocrats, keynesians like to deny scarcity or put the blame on an artificial scarcity created by someone. This is a kind of “Land of Cockaigne" assumption or "post-scarcity society". It is not a surprise coming from someone whose master said: "I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce." 

But ok, let’s ask the austrian: What would happen if the factor inputs or consumer goods are not scarce?   
"Labor is the most scarce of all primary means of production because it is in this restricted sense nonspecific and because every variety of production requires the expenditure of labor. Thus the scarcity of the other primary means of production—i.e., the nonhuman means of production supplied by nature—becomes for acting man a scarcity of those primary material means of production whose utilization requires the smallest expenditure of labor.”… “We may try to imagine the conditions within a world in which all material factors of production are so fully employed that there is no opportunity to employ all men or to employ all men to the extent that they are ready to work. In such a world labor is abundant; an increase in the supply of labor cannot add any increment whatever to the total amount of production. If we assume that all men have the same capacity and application for work and if we disregard the disutility of labor, labor in such a world would not be an economic good. If this world were a socialist commonwealth, an increase in population figures would be deemed an increase in the number of idle consumers. If it were a market society, wage rates paid would not be enough to prevent starvation. Those seeking employment would be ready to go to work for any wages, however low, even if insufficient for the preservation of their lives. They would be happy to delay for a while death by starvation. There is no need to dwell upon the paradoxes of this hypothesis and to discuss the problems of such a world. Our world is different. Labor is more scarce than material factors of production. We are not dealing at this point with the problem of optimum population. We are dealing only with the fact that there are material factors of production which remain unused because the labor required is needed for the satisfaction of more urgent needs. In our world there is no abundance, but a shortage of manpower, and there are unused material factors of production, i.e., land, mineral deposits, and even plants and equipment.”… “As long as the world is not transformed into a land of Cockaigne, men are faced with scarcity and must act and economize Scarcity of factors of production means that we are in a position to draft plans for the improvement of our well-being the realization of which is unfeasible because of the insufficient quantity of the means available. It is precisely the unfeasibility of such desirable improvements that constitutes the element of scarcity”… “The economists were and are still today confronted with the superstitious belief that the scarcity of factors of production could be brushed away, either entirely or at least to some extent, by increasing the amount of money in circulation and by credit expansion.”… “As far as natural conditions come into play, competition can only be “free” with regard to those factors of production which are not scarce and therefore not objects of human action. There the economic problem is to employ these factors in such a way that no unit of them should be used for the satisfaction of a less urgent need if this employment prevents the satisfaction of a more urgent need”… “The available supply of every commodity is limited. If it were not scarce with regard to the demand of the public, the thing in question would not be considered an economic good, and no price would be paid for it. What slows down technological improvement is not the imperfect convertibility of capital goods, but their scarcity. We are not rich enough to renounce the services which still utilizable capital goods could provide.”… “Originary interest cannot disappear as long as there is scarcity and therefore action.”… “The characteristic mark of production activities in the past and in the foreseeable future is that the scarcity of labor exceeds the scarcity of most of the primary, nature-given material factors of production. The comparatively greater scarcity of labor determines the extent to which the comparatively abundant primary natural factors can be utilized. There is unused soil, there are unused mineral deposits and so on because there is not enough labor available for their utilization.”… “The layman and the pseudo-economist fail to recognize this fact. They stubbornly refuse to notice the scarcity of the factors of production" (Italics and bold added)[6]
First fallacy: Mises actually did address the issue if a resource, like labor, is not scarce or if goods are non scarce. It must be emphasized that Mises did not “assumed full employment”. Actually he wrote assuming unused capacity and unemployment of labor even before Keynes did ever published his first important monetary book and when, according to Skidelsky, the english economist was still assuming full employment in his own analysis. Yes, there can be unused resources and labor in real world, but Mises would never use an unrealistic assumption such as deny scarcity i.e. say that “resources and goods are not scarce”. Note that the comment of LK goes far beyond than assuming idle resources, he is not comfortable with that assumption that Mises actually did. He writes about an abundance of all resources in all sectors. But even if there is such abundance, through credit expansion we must necessarily reach a point in a time in which complementary factor of production are employed. So far Mises' assumption is correct. However LK is assuming they never become scarce, they are “not scarce”.

Before we continue we must know: What the heck is full employment for Lord Keynes? "the US economy did not return to full employment for nearly a decade after 1893." According to his post in 1892 unemployment was 3.72% and in 1900 it was 5%. “What is frequently forgotten is that an economy mired in high involuntary unemployment, even if it has growth, is in an underemployment disequilibrium. The US from 1893 to 1899 was clearly such an economy. “ So for him an unemployment rate below or at 5% is full employment. Why not 5.01%? Or 5.1%, 5.3%, 6%, 4.9%, 4%, 3%...? 

It must be no surprise for anyone that the keynesian full employment goal is, as Robbins noted, inflationary, disequilibrating and contrary to liberties. But even assuming we can “define” full employment in a non-arbitrary and non-subjective way (which is not the case) and we arbitrarily choose one of all definitions(a definition which also changes according the times), if “had the factor inputs or consumer goods not been scarcethen how in the world are we going to "full employ" something which is not scarce? How are we going to achieve a goal, say 5% of unemployment, if there is an unlimited abundance (i.e. no-scarcity) of something? Remember that “daddy state” must assure full employment, so even if we could down the unemployment rate to 5%, given the fact that labor is no scarce, after that there would be an avalanche of new workers looking for employment pushing up the unemployment rate. Then the “all mighty” state would try to push down the rate one more time but, because there is no scarcity of laborers, there will be another tsunami of them coming to be employed. And we can do this forever because there will always be workers unemployed due to the fact that they are not scarce. Actually that explanation was also unreal because in an environment of non-scarcity of labor we could not even down that rate for a single moment: imagine you want to “full employ” some good which is not scarce, like air, by putting it in empty bottles. Employment would mean: air inside the bottle. Air (the not scarce resource) would be “employed” by occupying space in the empty bottle. Even if you fill out (i.e. give an “employment”) 1 billion bottles, you are not even close to full employ that non-scarce good. Not to mention to reach some 5% goal.  Even in “Lord Keynes”’s terms, that assumption of “no scarcity” of resources destroys his long-awaited full employment goal, because he cannot reach it! 

This post is not the place to show how wrong keynesians are on the issue of “idle resources”, but assuming abundance of goods and resources as “Land of Cockayne” is definitively a non-real criterion to operate. 

Mises would not make such nonsense as to assume that resources are not scarce. If there are unemployed resources and you force economy to employ them, then they must be limited, and that would mean they must reach a limit i.e. they are scarce. If you can never reach a limit, then you are assuming a continuous never ending stream of resources and that means you are in Land of Cockayne, a totally unreal assumption. Actually in denying scarcity not only you deny economics itself, you open the door to a lot of things to happen: In such world even socialism can work! 

He will probably try to escape the consequences of his own unreal assumption by saying “I did not meant an unlimited quantity of resources and goods.” But, yes he did! He was not talking about “unemployed factors” (because that would mean to give a victory to Mises’s 1928 comment), he actually said they are “not scarce”. Not-scarcity is a very strong concept because it means unlimited abundance from the point of view of acting man[7]. And worse than that, it means assuming that unlimited abundance is a common circumstance of the world. This is false: Unemployment of some factors and some economic goods (due to errors of past or because of the never ending change of valuations and circumstances) is a characteristic of a changing world, but the “not-scarcity” of all resources is not. Actually even if we interpret his words as a “massive idleness of all factors of production” it is not true at all that that is a characteristic mark of real economy. It is instead an specific feature of a depression situation, actually the deepest point of it, a situation bringed by a credit expansion policy. In that case LK's theory is thus just a "particular theory" (not a general one) or a "special case" (of the ABCT).   

In analyzing Huerta de Soto’s argument about the process of saving, he commits a great mistake. First he says: 
“The fatal problem underlying this analysis is that capitalist systems have historically had many periods when they are mired in underemployment equilibria where there are significant idle resources, like labour, raw materials, capital goods and other factor inputs.”
Only a month later he admits that Mises in 1928 was perfectly aware of what LK himself has asserted:
All that Mises does is admit the fact that capitalist economies do have idle resources, but then says that his cycle effects require that this abundance declines and the relevant factor inputs become scarce.” (Italics added)
In other words LK is saying that capitalism had had unemployed factors, which is exactly what Mises, in explaining his theory, had said in 1928!!!  

More important than that, HdS is explaining how a sustainable process of saving “liberates” resources to be invested because it is based on reducing consumption. But the spanish guy clearly explains, later in his book, that idle resources came up due to the fact that consumption is too high! “that capitalist systems have historically had many periods... where there are significant idle resources, like labour, raw materials, capital goods and other factor inputs.” is due to the fact that there was an excessive consumption relative to savings, but HdS is explaining a process in which consumption is falling relative to savings. They are two different situations (in one consumption is falling relative to savings and in the other consumption is excessive to savings), so there is no “refutation” at all.
"Many economists have misunderstood the fact that a significant number of the errors committed manifest themselves as completed capital goods which, nonetheless, cannot be used, due to the absence of the complementary capital goods or working capital necessary. Indeed many see this phenomenon of “idle capacity” as clear proof of a necessity to boost overall consumption with the purpose of putting into operation an idle capacity which has been developed but is not yet used. They do not realize that, as Hayek indicates, the existence of “idle capacity” in many production processes (but especially in those furthest from consumption, such as high technology, construction, and capital goods industries in general) in no way constitutes proof of oversaving and insufficient consumption. Quite the opposite is true: it is a symptom of the fact that we cannot completely use fixed capital produced in error, because the immediate demand for consumer goods and services is so urgent that we cannot allow ourselves the luxury of producing the complementary capital goods nor the working capital necessary to take advantage of such idle capacity. In short the crisis is provoked by a relative excess of consumption, i.e., a relative shortage of saving, which does not permit the completion of the processes initiated, nor the production of the complementary capital goods or working capital necessary to maintain the ongoing investment processes and to employ the capital goods which, for whatever reason, entrepreneurs were able to finish during the expansion process."
In short, in LK post HdS was talking about a situation where saving is increasing i.e. consumption is falling. But LK wants to “refute” that explanation using a phenomenon (idle resources) which only occurs when there is an excessive consumption relative to saving i.e. saving is falling.  

Then comes this:
“If an economy with significant idle resources has investment via fractional reserve banking or central bank creation of excess reserves (without prior saving in loanable funds), how will these inflationary pressures happen if productive resources simply do not need to be freed in the stages close to consumption?Such factor inputs will be available or quickly made available through increasing capacity utilization in the relevant industries.” 
The response to “how will these inflationary pressures happen if productive resources simply do not need to be freed in the stages close to consumption?” (a question he raised in June 2011) was given by Huerta de Soto just a paragraph later of the extract LK used in his following post on the issue (July 2011. Of course LK did not cited it)!!!:
"When credit expansion takes place, economic projects which are not actually profitable appear so, regardless of whether they are carried out with resources that were unemployed prior to their commencement. The only effect is that the nominal price of the original means of production may not rise as much as it would if full employment existed beforehand... apart from the fact that their price does not increase as rapidly in absolute terms, they may make a short-term slowdown in the production of consumer goods and services unnecessary. Nonetheless a poor allocation of resources still takes place, since resources are invested in unprofitable projects, and the effects of the cycle eventually appear when the monetary income of the previously-unemployed original means of production begins to be spent on consumer goods and services. (Italics added)
An amazing mistake, aggravated by the fact that Rodolphe Topffer (please read his amazing post in Meng Hu) remembered that to him in the comments section and LK's response is not convincing at all. 

After that we have this phrase:
“This is another unrealistic assumption underlying ABCT: it assumes an economy with full employment, no unused capacity and no significant idle resources.”
You are not drunk, you actually have read this quote coming from the guy who tries to “refute” a theory by simply making the “very real” assumption that we live in The Garden of Eden: “what would happen had the factor inputs or consumer goods not been scarce”. Even importing them we are incredibly far from saying that “goods and resources are not scarce”. 

In other post, he says:
"In a Keynesian system, we can stimulate the economy into full employment without war or military spending. You can give a huge Keynesian boost to the economy by (1) large infrastructure spending, social spending, education spending, or increased R&D. Alternatively, you can also give a stimulus by (2) simply cutting taxes without cutting spending, which is also a classic Keynesian method." (Italics added)
Has he said that “we can stimulate the economy into full employment”? This is a false statement according to his own arguments! Because to the extent that you approach to “full employment”, that would mean necessarily that the resources you are employing are becoming scarce. His stimulus-solution explanation “requires that this abundance declines and the relevant factor inputs become scarce” insofar as we reach the “full employment” goal. "Lord Keynes still fails to address the issue of what would happen had the factor inputs or consumer goods not been scarce." Once again he has contradicted himself and also has shown his double standard.
After this denial of reality, LK says: 
"(4) The natural rate is conceived as an equilibrium interest rate that equilibrates loanable funds supply with demand for credit. In Wicksell’s natural rate of interest theory, this is supposed to be the interest rate where money supply is neutral, and where inflation does not occur."
Mises repeatedly said that money can not/never be neutral in real world (only in equilibrium). Here LK is saying that Wicksell's theory operate with neutral money, then this only reinforce my interpretation. If Wicksell’s natual rate is an “interest rate where money supply is neutral, and where inflation does not occur” and we have seen that the non-neutrality of money is the basic requisite for the ABCT to be true, then ABCT can not use Wicksell’s natural rate. And in the hands of Mises, ABCT does not use it!
But all these arbitrary and dishonest criticism is not just a problem of LK alone. They are in the very beginning of “sraffian economics”. Why? Because, in his exchange with the austrian economist, Sraffa did not criticized Keynes’ use of Wicksell’s natural rate concept in public debate, he only criticized Hayek’s use of it. In the same review criticizing Hayek, he could have said: “Ok Hayek’s book uses the Wicksellian natural rate which is a faulty concept, but Keynes’s book (which Hayek criticized in the first place) also relies on it, so I have my reserves”. Did he do that in that moment? No. The same book Sraffa was trying to defend from Hayek, did use the wicksellian concept of a "unique-natural" rate of interest, but the italian did not say anything about it.  

Not only Sraffa. Keynes himself was not honest enough to correct the manuscript of GT in which he confessed that he had misinterpreted Mises' and Hayek's theory of interest! Robertson in 1935 (one year before the publication of the book!) showed him that he interpreted them wrong and Keynes responded: “Thanks for the reference to Hayek which I will study. I do not doubt that Hayek says somewhere the opposite to what I am here attributing to him.” Huerta de Soto says: “Nonetheless Keynes lacked sufficient intellectual honesty to correct the manuscript prior to its definitive publication in 1936."[8] 

It may be the case that in private correspondence Sraffa expressed his opinion sincerely to Keynes or even convinced him to abandon Wicksell by 1931, but the fact that he did not do it in public debate only shows his arbitrary and dishonest opportunistic selection in order to defend the english from the austrian. That was Sraffa's criterion of “you austrian are wrong because you are based on the wicksellian natural rate. But I will not say anything about this other english-guy despite the fact he also relies on it”.  

I'm aware I will unleash a blog-war on this issue, with “Lord Keynes” making his reply blog-post probably named “Debunking an internet-austrian”, “Refuting an idiot”, “A reply to dirty Sanchez”, “A critique of a stupid-ignorant-misleading-ridicule-pathetic-strawman-false blog-post”, and names like that. But my conscience would not let me sleep if I did not publish this post attacking his criticisms.



Mises’s Theory of Business Cycle is totally immune to Sraffa’s 1932 criticism. It cannot be affirmed that “Sraffa refuted ABCT” because a careful examination of Mises’ writings demonstrates that he was unable to do that. Despite the obvious fact that they never confront in a direct debate, written evidence can actually be confronted. As we saw, a careful examination of Mises’s writings can be used to overcome Sraffa’s critique to Hayek (who was using Mises’s theory).

Despite the fact that Mises did use Wicksell’s terminology in the beginning of his development, due to the fact he had not neither the time nor space to develop his own ideas on the subject, he did not fully endorse that theory and in his further developments on interest subject, the austrian abandoned the sweden economist.

Contrary to Sraffa’s criticism, the interest rate that Mises developed in his explanation was not a barter-rate, was not a unique rate in the real world, there was not a policy to make money neutral and there was not a policy for the banks to target the “natural rate”. The only policy Mises recommended to avoid cycles was not to target a "natural" rate, but that banks must not expand credit (fiduciary media or circulatory credit).

[1] Keynes, The General Theory (1936) pages 219-20.

[2] Leijonhufvud, Axel. “The Wicksell Connection: Variations on a Theme” (1979)

[3] Skidelsky, Robert. “Interpreting the Great Depression: Hayek versus Keynes” (2010)

[4]Grieve, Roy. “Keynes, Sraffa and the Emergence of the General Theory: Some Thoughts” (2008)

[5] If he has such opinion, it would be one of the few times in which I would agree with him because Keynes’s book is absolute worthless after Hayek’s two-parts demolition. He destroyed completely his arguments in one of the biggest refutations of Economic History. See “Reflections on the Pure Theory of Money of Mr. J.M. Keynes” part one 1931 y part two 1932. Note that Keynesians in general always run to embrace Sraffa and do not mention Keynes’s response to Hayek. Actually they try to minimize any mention of the exchange between Hayek and Keynes alone. The refutation and response of the austrian was so great that the reply of the master of keynesianism was absolutely worthless. As keynesians are unable to use a Keynes’s response, they must summon Sraffa. For example Skidelsky, in the article cited above, makes a little comment on the exchange between Keynes and Hayek, but just to mention a “recognition” that Hayek made about “revolutionary implications” of Keynes’s ideas, and of course says nothing about the contradictions and logical fallacies that Hayek demonstrated and Keynes failed to answer or even understand. However when he turns to Sraffa, Skidelsky has a clear and definitive verdict of that discussion: “[Hayek’s position] was also analytically incoherent, as Piero Sraffa pointed out, in a devastating review of Price and Production in 1932.” And he makes this interesting analysis of Sraffa’s critique: “Admittedly, Sraffa’s argument is incomplete, since, like Keynes at the time, he assumed full employment…”

[6] Mises, Human Action (1949) pages 135-36, 525, 263, 275, 356, 525, 593, 654.  

[7] Air for example is not “unlimited”, it is only from the subjective point of view of man. Air in the universe is incredibly scarce.  

[8] Huerta de Soto, Jesus. Money, Bank Credit and Economic Cycles (1998). pages 557-58.  

3 comentarios:

  1. Guillermo,

    I read your parts I and II of Sraffallacies: A Misesian Defense of ABCT.
    They were fantastic.

    I just have one question. I'm trying to figure out if it's a contradiction or not. Please clarify if you could:

    In part I you quote Agnés Festré's article: “Knut Wicksell and Ludwig von Mises on Money, Interest, and Price Dynamics” (2006) and “Knowledge and Individual Behaviour in the Austrian Tradition of Business Cycles: von Mises vs. Hayek” (2003), saying this about credit expansion and originary interest (among other things):

    “In every situation where the ‘money relation’ i.e., the ratio between the demand for and the supply of money for cash holdings is changed, the resulting modifications in the wealth and the income of individuals alter the height of originary interest. Thus, the driving force of money has the power to bring about lasting changes in the final rate of originary interest”.

    But then later quoting Mises' book Interventionism (1940) pages 42-43, you directly quote Mises writing:

    “At the beginning, the additional supply of credit forces the interest rate for money loans below the point which it would have in an unmanipulated market. But it is equally clear that even the greatest expansion of credit cannot change the difference in the valuation of future and present goods. The interest rate must ultimately return to the point at which it corresponds to this difference in the valuation of goods”.

    I'm not completely sure but this seems like the beginning of a contradiction. I'm probably wrong that's why I would love if you could clarify.


    Adrian Fiorito

    1. Hi Adrian! Thanks for the comment. Good question, I didn’t notice that. But I don’t think it is contradictory.

      It is perfectly possible that changes in money relation change distribution of income (non-neutrality) in an unknown way that alters the saving-consumption of so many individuals that it changes the market interest rate. But this is an indirect and long run effect (“**lasting** changes in the **final** rate of originary interest”).

      Mises said that the change in (market factors determining) originary interest rate is *indirect* i.e. via a change in an unknown direction in distribution. But in the second quotation he is talking about **short run** effects of credit expansion. As he assumes that money enters in credit market first (just before it starts to create its distributional effects), the process of redistribution is starting, but it is not yet completed. In the very beginning of credit expansion, money interest goes down, but distribution of income and time preference has not changed **yet**. And **in the very beginning** they will not change even if you inject $100 billion or $100.000 billion in credit markets, only in the after moment they can change as this credit money is spent.

      Thanks for the insightful question.

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