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To the extent that Wray is representative of economists in general, a lack of respect for the profession is richly deserved. It could be that Austrian Economists would be better off calling themselves Austrian Astrologists.

Regards, Don

You should be more kind to Wray, Dave. Schumpeter said interest is a tax on profit. He thought that increase to output created by innovation was necessary to pay interest. I don't agree, but it shows that sober and informed parties can have different opinions on these topics. Austrian theory of capital has problems, as I think we all recognize. It's not like our competing story is air tight. Add to that the fact that post Keynesians can tell a better story about the "state of confidence" than most others and you start to see how a serious person could be attracted to such views. I think they are wrong and I stand by the Austrian line big time. But you should give Wray and, especially, Minsky their props.


Instead of showing your emotions, you should argue more logically - dont you think ?


I do admit that I've come across with some emotion. Sometimes that happens, and it is somewhat uncalled for. So I rescind my "throwing against the wall" and "holding my nose" comment if this appears too offensive.

I've been reading a lot of Wray. I have big problems with his theory. I have bigger problems with his normative political economy. If a write a paper about his model, it will surely be toned down. A research paper is quite different than a blog.

I whittled away my emotions when writing about Minsky. In a paper forthcoming in the RAE, I treat his work seriously and give credit where credit is due. His work was difficult for me to absorb, and it has a nice degree of sophistication, but suffers serious errors.

And I agree that the Austrian theory is not airtight. I have spent twenty years -- quite a waste of my professional time -- trying to show that it suffers weaknesses in some places. Now I'm trying to move on and use the theory to deal with real issues like everybody else does. I think the weaknesses are far greater (on several topics) in some other schools of thought.

With apologies to Roger, I don't think Dave owes Wray anything. Based on Dave's post, Wray, to me, appears to be making an extremely transparent argument for Keynesianism simply for the sake of justification. The entire description of Wray's work reads as if Wray is desperately trying to find a way to force the puzzle to be complete, by taking a scissors to the existing pieces, with little to no regard for the final assembled picture. In another analogy, he's attempting to build the building from the top, down. That kind of intellectual gymnastics deserves exactly the respect Dave has awarded it.

To Poincare's note, I fail to see how Dave has NOT addressed Wray's work logically, even while being emotional.

Economists as professionals are under enormous scrutiny at this point in time, for a perceived broad spectrum failure to see what was happening leading up to the current crisis.

Given the ludicrous arguments made by Wray, who, as Dave points out, is at the forefront of Post Keynesianism (which is somehow the forefront of Economics at the moment) it's no wonder Dave is frustrated.

Wray has posited an answer first, and then proceeded to rewrite all the rules as it suits him to justify his answer, without regard for real world testing of those rules.

It's akin to if Galileo would have posited heliocentrism with all of his back up boiling down to "because I think so."

There is an important lesson here in Bastiat's essay 'What is Seen....' That lesson is not in the theme of the essay but in the way that the argument is laid out. Bastiat takes a commonly held view, lays it out clearly and then slowly and carefully demolishes it.

Wray and co are influential because what they say sounds right to people. What they say seems to make sense. Austrian economics is often, usually, counterintuitive.

I think this imposes the requirement of the utmost patience on the part of Austrians. If this stuff was intuitive then it would just be embedded in the prevailing culture - which it isn't.

Menger allowed that the State plays a role in the emergence of money: ‘Within the boundaries of a state, the legal order usually has an influence on the money character of commodities which, though small, cannot be denied.’ (261) '... the sanction of the state gives a particular good the attribute of being a universal substitute in exchange, and although the state is not responsible for the existence of the money character of the good, it is responsible for a significant improvement of its money-character.’ (262)

If we look at Wray's point about taxes and money, we see how what he says could appear to be right.

A farmer barters with his neighbours, he and his neighbours even use nails or bushels of wheat as 'eminently saleable commodities'.

However, one day the farmer gets a tax demand which must be paid in gold coin. Competition may not be the only discovery process. Under severe pressure to obtain the gold, the farmer embarks on a new adventure, he takes his produce to the nearest town and sells it for gold. He is lucky and his adventure is a great success. But this adventure has taken a huge amount of time and so he has not had the time to make his winter boots like he usually would. So with a bit of surplus gold he buys a pair of boots and a ribbon for his wife. He also has a beer before he leaves town. When he returns to his village he has no wheat or nails left but he has some surplus gold coins and he uses these to buy produce from his neighbours. They use these coins to pay taxes etc...

So far, so mundane. But let's look at this not from the farmer's perspective but from the King's perspective. What happened in that little village before was invisible to him, nothing was produced there and nothing was acquired. There was no economy there, that he could see. But all of a sudden with the introduction of taxes, goods flow to and from the village. Taxes have driven the need for gold coins and the need for gold coins has 'created' trade. What a success!

Looked at that way, Wray's point seems sound. However, it is only by raising things that he has not considered that we realise he is wrong.


My post was only a brief reflection on Wray's basic argument in that one book. To be fair, one should read his work. Many working papers are available at the Levy Institute website:


Bad link.

See www.levy.org

To avoid getting angry when reading (post) Keynesian economists, I like to replace the government in their models with a large private non-profit organization. Through good advertising and moral suasion this non profit has convinced a large percentage of the population to donate to them, and as a result it finds itself responsible for 5-10% of all economic activity.

Should this organization try to be an Employer of Last Resort or is it wasting its time? Might it make sense for it to run deficits?


Your "throw this book ... against the wall" and "hold my nose" comments were made *about* the book, and not about the author or his other work. And this is a blog -- why not tell us how the book makes you feel? I don't think people come here to read impassionate and technical mini research papers.

Aidan's description of the farmer is insanity. I'm not sure if he's quoting Menger, but in any case, it's an issue of somebody being too philosophical about a common sense issue.

Taxes do not beget money. Money arises in some respect first as a means of widespread trade, so that people are not continually trading nails and hay for oil and wagons. Money is the means to the end of portability. What people use as money is irrelevant, so long as they hold that it has a common value. At some point, as governments form, they begin to tax the flow money to run their operations.

In the situation put forth, the government has spurred the SPREADING of the USE of money via its taxation, but it has hardly CREATED the NECESSITY for money via taxation. That very same farmer could just as easily have decided to take the king 10 bushels of wheat and a bucket of nails as payment and said, "take it or leave it, but this is what I have."

Money pre-existed market economies. Of course, it didn't pre-exist exchange, but money developed at a time when most people consumed what they produced and produced what they consumed. In a substance economy where cattle, sheep, wheat or rice are staple products, the typical barter transaction is going to be a with those staple products. Problems with a double-coincidence of wants are really not that significant. Some story about priests and standard offerings are not implausible.

But speculation on the prehitory or ancient history are hardly essential. If taxes were abolished the demand for money would fall to zero?

If Arnold Kling had said that he had to hold his nose while reading Human Action, I think we could expect a 3 page long blog post from Pete Boettke listing the virtues of the book and the current Austrian research program.

If you don't like people margalizing your heterodox approach to economic science, maybe you should think twice before pooh-poohing others.

While, again, I shared with my readers my emotion -- my frustration, to be exact -- I certainly didn't "pooh-pooh" anything. I spelled out what I interpret as some of Wray's arguments, and I mention where I think they are questionable. Cut the last two sentences out of my original post. Where am I pooh-poohing his argument?

Hey, no piling on. Dave apologized for a couple of intemperate remarks. Let go. Indeed, although I was quick to call him on it, we should not forget the good side of Dave's emotion. This stuff matters to him. He's going into it big time, not just casting it aside with a casual wave of his hand. It is a kind of complement to Wray that Dave is all hot and bothered by what Wray writes. So, okay, we should, like, avoid intemperate remarks and all, but Dave is doing precisely what scholars are supposed to do. He is taking the other pov seriously as if it matters, which it does. So let's stop talking about Dave's manners, which are in perfect order, and start talking about something interesting, like that state of confidence and why it fell out off the radar screen of post-war economics.

What we need right now is an updated version of a "The Failure of New Economics" to cover all the fallacies of Post-Keynesianism (while giving them credit where its due)... Therefore, I'm waiting to see Dave's paper on Minsky...

To Pooh-pooh means to express contempt or scorn. If you ignore the two sentences where you express scorn for what you're reading, then you're right your post didn't pooh-pooh anything. But I'm not sure what your point is. "Hey man, if ignore that joke I told about your mother's weight, then you would have no reason to be mad at me!!"

Now, I'm sure you could argue symantics about whether you were actually meant to sound scornful ("hey, wanting to throw a book against the wall and having to hold my nose just to read it isn't suppose to sound scornful, infact its a complement I would spend my precious time lowering myself to refute these falacies!!"). That's fine. Folks will say a lot of things to avoid appologizing for saying silling things (you still have not actually said "i'm sorry").

But I don't feel like taking this much further. So make whatever excuse you think makes your behavior appropriate. I just wish you would run these types of thoughts through a filter to see how you would feel if someone said the same thing about a book you wrote.

Hmmm. As almost certainly the only card-carrying member of the SDAE both to have coauthored a paper with Randy Wray (some time ago and not on this topic) and also to sit on the editorial board of the JPKE, in short one of those odd characters who wanders around on the narrow interface between Austrian and Post Keynesian economics with a stronger tilt to the PK side than most, I think I will throw in my two bits.

First, and I gather Dave would agree with this, let us not confuse Minsky with Wray. There certainly is overlap, and Minsky was a supporter of government being an employer of last resort at least to some degree. But there are many differences between his views and Wray's. I shall also comment that Wray's own views have evolved and have become further away from more mainstream views of these matters in more recent years, for better or worse.

I would also say that there is an institutional reason why the group around Wray is particularly influential among PKs right now. David Colander has recently commented that the PKs are doing a lousy job of reproducing themselves, and even compared them in this way to the Austrians, who he said were doing a good job of this, or at least a much better one than the PKs. As we all know, much of this has to do with having influence in departments with grad programs, and whereas Austrians have probably gained recently in that regard, reproducing themselves more and more, PKs have lost out. As it is, one of the few places openly produing Post Keynesian economists is UMKC where Wray and some of his close allies are located (the Levy Institute does not have a grad program). So, while Wray's views may actually be a minority among PK economists, they gets outsize attention because of the important role currently being played by his department.

So, on to substantive issues.

1) On this I agree with Dave and the Austrians and have argued at length with Wray and others on this. I am not sure what he is saying in his latest stuff, but when I have pushed people on this I get back a response that they recognize that media of exchange can spontaneously appear as Menger argued, say cowrie shells or wampum. However, for them it ultimately is a definitional matter. Money is what the state accepts for tax payments, period. So, as long as these spontaneous media of exchange are not used to pay taxes to any government, they are not "money" and that is that (btw, this is also known as the "chartalist" theory).

So, when West African kings not only accepted cowrie shells from the Portuguese to sell them slaves, but also took them as payment for something resembling taxes from their citizens, then cowrie shells became "money."

2) This is not a simple matter, and I think there is a middle position. One can only reject this outright if one totally buys Say's Law, and I know many Austrians do. But even Say himself recognized that people might hoard money under certain circumstances so that savings may not lead to investment.

Of course, the harder part is accepting that somehow investment can happen without savings and generate savings. Certainly if I can happen without S, then it can generate S through growth. Why does China have such a high savings rate? A lot of it is inertia in consumption behavior combined with a rapid growth rate. So, people are cautious and only gradually adjusting upwards their consumption. As income soars upwards more rapidly, savings naturally increases.

Furthermore, we have had a terribly low savings rate for some time in the US, but investment has held up (clearly not generating the savings though). This has entailed borrowing from abroad, and there is some limit on that, although it may be related to the ability to pay the interest on those rising foreign debts rather than something else about their existence. There certainly is no necessary short-term immediate limit on this.

3) This is an area where I think Wray's own views have changed, and he used to be less definite about this elasticity being infinite. I do not think that is ultimately a tenable position, but I also do think that in the short run for a lot of monetary policy, it is pretty close to what goes on. The Fed sets the federal funds rate and the discount rate, and then money is endogenously created pretty much. I do think the Fed can put an absolute limit on this, but some argue that then the borrowing simply moves over to quasi-monetary instruments, although this can begin to run into contradictions with the chartalist theory if it goes too far.

4) is probably the one of these I am the least in agreement with.

5) This one is not totally unreasonable, but in fact I think the Fed can manipulate reserves if it wants to, and some of the dramatic moves by the Fed in the past year or two show how this can be done (and not everybody here would approve of much of what they have done).

6) On this one my PK tendencies beat out the others. I have from Day One thought that the natural rate of unemployment theory was an exaggerated joke. Yes, at any point in time there is in any given economy probably some "equilibrium" rate of frictional and structural unemployment that can be labeled "natural." Is this "full employment"? Not usually. Does the economy "naturally" go to this rate if there is laissez-faire? Why and how? I don't see it. And, to get really fussy, is this rate identical to a NAIRU, if the latter even exists? The evidence from the 1990s pretty strongly says "no." As the unemployment rate shot below the long-advertised "natural rate" and inflation kept declining, various folks just declared that the natural rate had fallen Wow.

Indeed, the defenders of the natural rate have made complete fools of themselves as far as I am concerned, although it continues to be treated like some holy gospel in most macro textbooks. One sign of the problem is that the natural rate is endogenous to the most recent rates, something understood from Day One by Phelps and many others, if not Friedman or Lucas. So, if the actual rate goes down, the structural rate goes down because newly employed workers gain skills making it easier for them to get hired, which then lowers this supposedly sacrosanct "natural" rate. Something that easily changed is not something people should be making any sort of big deal about.

I could critique the natural rate of interest here as well, but that is a sideshow, and would just bring down too much wrath upon my head, :-).

7) Crowding out can happen, but it is not inevitable, especially when there is lots of unemployment and excess capacity of capital stock. It depends on the state of the economy. And deficits matter more if they are owed abroad, which is a problem now for the US economy.

Finally, while I do not see government as employer of last resort necessarily causing macro woes, I do agree that there are serious problems with rent seeking and just how one runs it, problems that are very far from trivial. There is also the matter of that it would be preferable if these people actually did something useful and productive rather than the old line from Keynes about "digging holes in the ground to refill them." This has never appealed to me much.

A Keynesian (post or otherwise) reversing cause and effect? How utterly unsurprising, as that is precisely what Keynes did over and over to come up with the utter nonsense that was his "economics" and which has ruined the last century of economic thought and practice.

Dave was kind enough to send me a draft of his Minsky paper a while ago (thanks Dave) and I can attest that, while I have more sympathy with Minsky (and Wray) than Dave, his paper comes across as both scholarly and un-emotional.

My own take, to borrow from Schumpeter, is that Austrians have a Real Analysis mindset and PKer's are Nominalists and have a Monetary Analysis mindset. So cross-paradigm discussions are difficult.


What do you think about Wray's reversal here: that changes in the money supply create changes in the monetary base, rather than changes in the base causing changes in the money supply? Wray uses this to argue that the money multiplier is a "myth."

I do agree with him that the money multiplier is not as stable as the textbooks often presume. Is he simply saying that the notion of a *stable* money multiplier is a myth, or that the concept in general is fallacious?

knapp is correct (not the real Knapp!). Comparing the two schools is quite difficult. What we have here is a good example of theory-laden perception -- even in its simplest dimensions, such as definitions. Define money as the medium of exchange, and it's the product of evolution. Define it as that which is used to pay taxes, and it's the product of the state, as Barkley said. Differing definitions then lead us into differing questions regarding the value of money, and so on.

Austrians and Post Keynesians will read the facts and select the facts (of, say, the crisis) differently. Frankly, I think that while each school will criticize the other neither will reach any agreement, neither will be persuaded. In my case, I don't expect that my criticism of Minsky's effort will lead Post Keynesians to question their own analysis. Perhaps that will be because of a weakness in my own analytical abilities and persuasiveness. Perhaps, in part, not. I do hope that it makes an advance in Austrian theory. We shall see.

Thanks for reading my paper, knapp. I should say that, thanks to some wonderful referee comments, the final draft in the process of production is much improved.

As an Australian economist, with an newly found interest in (passion for?) Austrian macroeconomics, I have read with interest, the work of an Austrlian academic, Professor Bill Mitchell (blog here: http://bilbo.economicoutlook.net/blog). He makes the same kind of arguments as Wray. I posted a comment on his blog about the intertemporal structure of production, the lack of a role for relative prices and the many problems of a zero interest rate (which is the logical extreme of his, and Wray's theory). He dismissed my post as being too focussed on micro problems which his theory pleasently assumes away, along with all of the public choice issues raised above. It was at this point that I gave up as there seemed to be no convincing him that they work at too high a level of aggregation to observe the interesting features of an economy (as is the wont of keynesians - new, old and post varieties inclusive). Mitchell seems to be on a bit of a crusade against Austrian economics at present, which is why I joined one of his blog debates in the first place, but he seems to be attacking a straw man version. The thing is Austrians (like yourselves) and post-keynesians (such as wray and mitchell) seem to talk past each other. The main reason I can see for this is that Austrians can't see any role for a macroeconomics that doesn't have solid menegerian (micro) foundations, whereas the post-keynesians see micro issues as being a seperate discipline. I'm glad to see I'm not the only one who has a similar reaction to modern monetary theory.

couple of points,

no one accepts the lira, franc or mark for anything now that their issuing governments accept the euro for payment of taxes .

government spending creates fiat money and taxes destroy it (also called vertical money). bank loans create bank deposits (one component of horizontal money) so paying off loans destroys bank money.

Peruse the Fed's Z1 flow tables to see this in action. Currently we are seeing the destruction of bank money. Government has increased fiat money allowing for an overall increase in the money supply.

Winslow R.,

I don't get your first point. You can't get lira anymore. That currency doesn't exist. There was a big switch date, after which you couldn't use it anymore. You had to turn it in at an exchange of 1,936.something lire per euro. It's not that no one accepts lira, it's that no one can get lira. Many Italians (especially older ones obviously enough) still think in lire and can't adjust the Euro. I've had conversations like this:
"How much do you think that car costs?" "Oh, 100,000 euro." "How much is that?" "2 hundred million lire." "Wow! That's a lot!"

Same goes for all the currencies converted to euro.


Mitchell is Austrialian, not Austrian.


I think that reversal is hard to argue for, but not impossible. However, I see the chain of causation as being very long and thus weak.

I do not think the money multiplier is a myth, but it has certainly gone completely unstable and totally blooey recently.

I stayed away from the intertemporal coordination issue. However, I think this is a place where serious Austrians need to think more seriously. There is no such thing as "the interest rate," whether natural, artificial, or whatever. There is a term structure of interest rates that itself varies in shape over time, sometimes inverting, sometimes being non-monotonic. This latter raises the sort of capital theoretic problems that bothered Hayek in The Pure Theory of Capital and the Roger Garrison takes seriously. I also note that this is a point where there is some overlap between Post Keynesians and Austrians, at least small subsets of each.

"I think this is a place where serious Austrians need to think more seriously." Hear, hear!

Taxes are abolished and there is no longer money?

How likely is that?

Other than that, much of the PK business is perfectly consistent with sound macroeconomics.

It is normal for central banks to target nominal interest rates, which makes the quantity of base money, and more inclusive conceptions of the medium of exchange both endogenous. Perfectly elastic at "the" interest rate is more or less correct, because that is what the central bank is choosing to do.

Quantity theorists (including Austrians) claim that this is probably a bad policy approach. Ideally, the quantity of money should match the demand to hold money, and market interest rates should adjust based on simple supply and demand so that they equate saving and investment at the full employment level of output. (Yes, Barkely, I believe those are all sound, if somewhat fuzzy concepts.) However, if the market interest rate is targeted at the natural interest rate, then, more or less by definition, the quantity of money will adjust to the amount of money people want to hold. This is the core of Wicksellian macro.

Now, if there is an excess demand for money at the current price level, then output and employment will be contrained, and below full employment. Real output will fall enough so that the demand for money equals the quantity of money. An increase in the nominal quantity of money or a reduction in the demand to hold money (and buy other things) will loosen that contraint. Aggregate demand will rise and so will output.

If the central bank is targeting interest rates, then if the interest rate is above the natural interet rate, then there is an excess demand for money and output will be limited by that shortage of money. While the surpluses of products and labor put downward pressure o prices, and lower prices raise the real quanitty of money, they also reduce the nominal demand for credit, and so less lending by the central bank will result in a lower nominal quantity of money. Avoiding this problem is why monetarists oppose targetting interest rates. The Wicksellian solution is to lower the market interest rate, of course. With deflation, even lower nominal interest rates may imply higher real rates, so there is no end of problems.

Interest rate targetting is dangerous.

As for this investment causing causing saving business, well, that is right out of Keynes. With a proper Yeager and Wicksell twist, if we have monetary disequilibrium, and output is contrained by what would be a shortage of money at full employment levels of output, and someone decides they want to invest more, borrows at the target Fed interest rate, and the quantity of credit and the quantity of money rises, that will clear up the money shortage and will raise output and income. Even if someone decides to shift out of money holdings and instead invest, even without borrowing from the central bank, the reduced demand for money will have the same effect.

And, if saving is positively related to income, that will raise saving. My view is that saving will increase to match the investment--it is the Wicksellian way as well as the Keynesian way. But I can't forget Yeager. The more basic phenomenon is that we are creating a surplus of money at the depressed level of income, or more fundamentally, reducing the shortage of money that would exist if real income were at its full employment level. Of course, if we start hitting capacity constraints, then you will run in to "Austrian type problems. Saving doesn't always rise to meet investment.

It seems to me that the public finance story is much the same. It isn't so obvious to me, but if we have interest rate targetting, and an excess demand for money (so the target is too high,) then more government spending corrects the monetary disequilibrium, raises output, and raises tax revenue.

Assume monetary disequilibrium. Assume interest rate targetting. And then it all follows. Until you hit full employment.

I admit that I don't follow PK that much, but my impression is that mostly they make arguments about financial instability that to me suggest that the demand for money and the natural interest rate change often and by large amounts. So, fixing the quantity of money (which I don't favor) and clearing up monetary disequilibrium by changes in the price level (which I don't favor) would involve big changes, not small ones. Thinking about interest rates, they tell stories that suggest that maybe the market interest rate will need to be negative sometimes. My view has been, well, maybe. I would prefer to have market institutions that would allow for stable growth of nominal expenditure in the face of the sort of financial instability they claim is the result of uncertainty. (You know, that Shackle connection.) Oh.. my impression. Then, their bottom line is--the only answer is socialism. And then, they remind me of the Rothbardians--like a photographic negative.

Just to be clear, most PKs who talk about ELR don't see it as being directly run by the Federal government. The jobs need to be funded by the Feds, but the actual running of the program could be farmed out to states and localities. As I've thought about it, I've imagined towns and cities offering ELR jobs to all and sundry, with competition between different agencies serving to keep things honest (i.e., if there's a guy in one town demanding kickbacks, or mistreating workers, etc. you can go to the next town or to a state agency. They all pay the same wage, but the jobs (while unskilled) could be wildly different. And on the worker's side, the fact that they can always go elsewhere means that they can be freely fired - ELR means a right to A job, not to any particular job. The deadbeats and lowlifes would tend to filter down to picking up roadkill, while the temporarily down on their luck would read to kids in the library.

I agree, though, that most PK writing on the topic is woefully shallow on the practicalities of the program. I attribute this to the fact that it takes so much effort to convince people (mostly unsucessfully in the case of Austrians, but that's not surprising) that it won't "bankrupt the nation", that the details seem relatively unimportant.

The PK view on the causality of bank reserves and bank deposits is absolutely correct. It is an indisputable operational fact. But the rest of it, such as the role of taxes and the employer of last resort, has nothing to do with the first.

I don't see the Menger story and the tax story as incompatible.

A number of goods could all be useful as a store of value and an easily exchanged good -- and as a "big player" the monopolist of force / taxer is going to exploit one of those, and make that good even more easily exchangable, by demanding that everyone come up with it at tax time.

David wrote:

"He argues that Menger's story of the evolution of money is unfounded. Money first emerged by the state's power to tax."

Of course the Post-Keynesian's won't be persuaded that they are wrong.

But, I think criticizing them is useful anyway because it can be used to persuade economists who are bystanders to these debates.

A Post-Keynesian cropped up on Scott Sumners blog recently certainly he never changed his mind. But when Scott and I brought up the arguments against some of his positions he ended up looking pretty silly.

I was inspired by L. Randall Wray (and also my father's work) on ELR programs to write my agent-based model of the market, and its ELR program. My focus was not on his monetary theory but on his idea of stabilizing wages and boosting employment by hiring through the public sector.

As you point out, he does not consider crowd-out effects. Essentially, he ignores this possibility and focuses on Keynesian ideas about multiplier effects. As with many Keynesians, I think he has replaced the study of the possibility with his rational thinking mind and basic logic, with a lot of fancy mathematics.

@JP far above:

One may very well think of a non-profit ELR-type program. Pete and Emily Chamlee-Wright and I have been part of an interdisciplinary group who has been studying the "independent" or "voluntary" sector and its ability to provide its own type of safety net. I would picture it as a set of different organizations as opposed to a huge non-profit monopolist.

In his Reclaiming the American Dream, Dick Cornuelle has gone so far as to say the independent sector could solve the unemployment problem along with many other social issues. I think it might be utopian, but it may very well be able to reduce unemployment.


I agree that the Austrian theory's notion of "the" natural rate is not fully worked out. It does downplay the term structure of interest rates. Would it be more satisfying to say, however, that were the banking system (central or free) be able to achieve a sustained monetary equilibrium, the structure of interest rates would more-or-less generate a saving-investment flow that does reflect people's time preferences? Or, at least, allow for a sustained development in the capital structure that would not lead to business cycle problems? I tend to think so. It seems to me that when central banking policy itself creates monetary disequilibrium (i.e., assume that the demand for money is unchanged but the Fed alters the money supply for whatever reason) the resulting changes in interest rates lead to a change in investment (and alteration of the capital structure), and that change in investment is a response to the Fed's change of plans, and not a change of household consumption and saving plans.

The natural rate isn't an interest rate anymore than the price level is a price; it's just much easier to write "the natural rate," than "the structure of interest rates with a propensity to generate a saving-investment flow that reflects people's time preferences."

Barkely Rosser, I am Australian myself, so I realise that Mitchell is Australian. That's why I mentioned him?!?!?!?! Apologies about the typo, but most readers would have most likely understood that I meant Australian.

The entire obsession of Keynesian thinking is to prove that I and S are not equilibrated by the interest rate, but rather by changes in total output.

If you wanted to express Keynesianism in a single phrase, it would be; assume the rate of interest is always above the rate that produces full employment. Or simply; assume the rate of interest is fixed.

All the Keynesian claims of 'underemployment equilibrium' and the need for deficits and state manipulation of interest rates follow logically from this premise.

What Keynes' and the Keynesians have done is to play the assumptions game; assume all prices are adequately flexible, except for interest rates (and maybe wages), and assume that industrial investors are collectively prone to the manipulative forces of the 'animal spirits' in their decision making. Proceed from there. The conclusions follow with perfect logic, but the assumptions remain completely arbitary.

The point of Keynesian thinking is simply to justify state intervention for political reasons. It has nothing to do with good economics. Post-Keynesianism is just a continuation of this trend. Why get angry with it when you can ignore it instead?

Prof Koppl (or any other prof):

"Austrian theory of capital has problems, as I think we all recognize. It's not like our competing story is air tight."

I know of several articles and remarks about the topic, but nothing like a complete list and analysis of these issues.

Is there a bibliography to analyze these problems throughly?


Not particularly.


Like Barkley, I'm not aware of anything. Hm . . . maybe somebody should work on that, especially if they are a Lucio Battisti fan.

Lucio Battisti who is he, a capital/growth economist?

I think the problem with the use of a single "rate of interest" isn't mostly in capital theory. It's more in places where other parts of economic theory meet.

In the UK interesting things have been happening in the savings market recently. Banks are offering 1 and 2 year fixed rate bonds to private savers. These bonds yield much more than the traded treasury bonds do and much more than the BoE interest rate. But, since they are backed by deposit insurance they are quite safe for the savers.

So we have a situation where different rate structures are being offered to different sorts of investor because of a state intervention. I don't know where to start in analyzing the effect of something like that.

What is the best "austrian" treatment of the determination of the natural interest rate and how it is impacted by technology, expectations, public finance, international capital flows, and the like. I don't have much patience for arguments about how interest would not exist without time preference. It isn't that I disagree, but rather I am more interested in what determines the actual level of interest rates and what might cause changes in the natural interest rate.

The recent crisis has also made me very concerned about risk premia and term structure.

Perhaps I just haven't read enough, or have forgotten what I once read, but most Austrian treatments of interest rates are in the context of monetary disequilibrium causing a deviation of the market interest rate from an unchanging natural interest rate. My ignorance on the matter is apparently not unique. I have read many "amateur" Austrians on the web pretty much asserting that in a free market the natural interest rate would hardly ever change.

Bill said: "I have read many 'amateur' Austrians on the web pretty much asserting that in a free market the natural interest rate would hardly ever change."

I wouldn't call myself an "amateur Austrian," but I am certainly an amateur.

What little thought I have given to the issue inclines me to believe that the natural interest rate, like the price level, would change more slowly and smoothly with free banking than with central banks. But anything that might alter the supply and demand for credit, even value changes with regard to saving and risking, are surely the culprits you're looking for.

Perhaps I just don't understand your examples.

Current: Lucio Battisti is a singer, the author of a song called "September 29th", that incidentally is the name of my blog. It is also Mises's birthday, and that's the reason for the name. It is also Berlusconi's, but I didn't know it in 2005. :-D

Prof. Koppl: although I don't like Battisti, I think in 2050 I'll be enough knowledgeable about the topic to try writing a paper. Thanks. :-)


If not you, whom? If not now, when?

Besides, you won't know anything about the topic *until* you have written a paper on it. You won't know anything about *while* you are writing, only *after.*

"If we knew what it was we were doing, it would not be called research,
would it?"
Albert Einstein

Bill Woolsey: the natural rate of interest may change, it is probably only an approximation to keep it constant. Being the equilibrium rate of interest* unobservable, you can never know where it lies, at least a priori (which means that it's determination is a matter of entrepreneurship).

There is at least an instance in which the natural rate of interest is supposed to vary in the literature known to me: in "Investment that raises the demand for capital" (avalaible on mises.org) Hayek makes the point that overinvestment in fixed capital can cause a thirst for capital causing spikes in the short-term interest rates due to increased demand. This can be interpreted as an increase in the natural interest rate, but one must be aware of not confusing long and short term concepts of equilibrium: in Hayek's paper, it is a short term demand for loans that causes the interest rate to spike at the onset of the recession.

Simplifications (like Hayek's triangles) should be employed every time they don't affect the result. If you want an explanation for the spikes in interest rate which occurs on the credit markets at the beginning of the recession (or that it would occur without a central bank) Hayek's story is perfectly convincing. I don't see other cases where you need to suppose the natural rate of interest to vary to explain an economically relevant phenomenon. However, the natural rate of interest is not constant and it may be often inconsequential if it is or not.

I haven't been reading that paper for a couple of years. No guarantees I got it wholly wrong. :-)

* In Wicksellian theory, the interest rate which keeps prices constant. I prefer to say "the interest rate which equilibrates supply and demand of capital"

Source material at www.moslereconomics.com including
'Soft Currency Economics' and other writings under 'mandatory readings'

The definitive paper is:


The $US is a (simple) public monopoly. That's the operational fact, not theory or philosophy.

See also Mosler 2012 on Facebook and www.mosler2012.com

Also, a good place to begin is the
brief draft of 'The 7 Deadly Innocent Frauds of Economic Policy at:


Coming out as a book April 15

Looks to me that Austrians should be able to recognize a monopoly when they see it? Especially a public monopoly?

Leaving the word 'money' aside, the currency called the US dollar should be immediately recognizable as a (simple) public monopoly? And we all know how monopoly works, right?

So how about the Austrians start from that obvious fact, along with the obvious fact that we have a non convertible currency regime and a floating fx policy?

ADDENDUM: My last two sentences were uncalled for.

Yes, they were, but they are telling nonetheless. Modern Money Theory is largely descriptive, not prescriptive. In the last analysis it is about accounting identities, which keep track of the elements in question. In this sense, feeling revulsion towards the contents of Wray's book is somewhat akin to find revulsion in the description of a mechanism which one would prefer to have functioning in some other way. If I describe an engine that runs on gasoline, and you have a vested interest in diesel, you might find all talk of gasoline-powered engines distasteful, but surely that would be irrelevant to an accurate description of how such engines operate.

Much in economics is bound-up with ideology. That is why it used to be called political economy. This means it is inevitably bound-up with philosophy.

MMT is not a branch of political philosophy. It is a description, not a prescription. This is why experts in MMT are at pains to distinguish the actual operational realities from the public purposes to which they can be applied, and which pertain to the realm of politics, philosophy--and to economics, to the extent that economics is bound-up with politics and therefore philosophy, but not to the extent that it is bound-up with accounting identities and institutional operations which can be described objectively like the gasoline-powered engine.

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