Austrian Macro I. Intermediate Macroeconomics ECON-305 Fall 2013 Professor Dalton Boise State University. Post Keynesians and Austrians. Shared Criticisms. Austrians and Post-Keynesians share four criticisms of orthodox macroeconomics:
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ECON-305 Fall 2013
Boise State University
Austrians and Post-Keynesians share four criticisms of orthodox macroeconomics:
(1) Equilibrium approach overlooks processes of adjustment;
(2) Rational expectations framework minimizes fundamental uncertainty regarding the future;
(3) Equilibrium theorizing minimizes attention to how historical past influences historical future; and
(4) Treatment of economy as if barter with a numeraire overlooks the effects of money on economic relationships.
Macroeconomics has to concern itself with capital structure.
Money is a “loose joint” that binds the supply of capital goods and the subsequent demand for the corresponding consumer goods.
Monetarist tight joint
Keynesian broken joint
“…capital gives money time to cause trouble.”
- Garrison, Time and Money, p. 8
Integration of growth theory and theory of fluctuations
Where money enters into the economy matters
Monetary injections and leakages alter the distribution of wealth and thereby alter relative prices and the allocation of resources
Money can never be neutral in its effects on production and consumption
Money is always non-neutral
Monetary injections in a modern financial system are through the banking system
Money is “lent into existence” not “spent into existence”
Monetary growth alters the interest rate and affects the intertemporal allocation of resources
Financial capital is the available fund that arises from decisions of individuals businesses to neither consume nor hoard (=Saving)
Saving is the source of the payment of factors of production in time-consuming production processes
The demand for and supply of loanable funds determines the equilibrium interest rate
Key factors of production are the heterogeneous capital goods that go into making a product
Every consumer product has an “ancestral lineage” of previously applied factors of production, including heterogeneous labor and capital goods
At every stage of the lineage from original factors of production to finished consumer product, entrepreneurs are making a decision between current expenditures and expected future discounted revenues
When the production process is in intertemporal equilibrium, the discount rate will be the equilibrium or natural interest rate
In order to maintain the “ancestral lineage” necessary to continue the current production of a given consumer good, prices paid and received at each stage of production must continue to reflect normal profitability (the discount rate)
Changes in the interest rate change the discount rate and therefore change the relative profitability of different stages of the production process
Changes in credit can come from either changes in real saving or changes in the money supply
Changes in credit change the interest rate
Changes in the interest rate change the profitability of different stages in production processes, altering the intertemporal allocation of resources
An unsustainable boom is initiated by an actual interest rate below the natural interest rate.
During an investment boom initiated by changes in technology, one would expect the demand for loanable funds to rise relative to the supply of savings. This should cause the interest rate to rise.
If the central bank steps in to moderate interest rates, the interest rate might stay the same or rise but still be below the natural rate, making the resulting boom unsustainable.
No real world analog to natural rate of interest
Capital aggregation problems
Dependent upon expectational lags (not consistent with rational expectations)
Overemphasis on interest rate miscoordination
Unpopular policy prescriptions
Expectations are forward-looking but each individual agent possesses unique, diverse and partial knowledge-information sets; coordination failures are possible
Economy has a tendency towards intertemporal equilibrium output and employment through entrepreneurial adjustments to relative prices
Cantillon effects assures non-neutrality of money in short and long run
Discretionary fiscal and monetary policy increase uncertainty and increase likelihood of coordination problems; rules are preferable to discretion and automatic institutions are preferable to rules.