It's the Investment, Stupid II: Mankiw Edition

Steven Horwitz

It's not just Bob Higgs, it's also Greg Mankiw.

• The subpar recovery has coincided with a historically weak investment recovery. Compare our recent experience with that of the early 1980s, when the nation last experienced a deep economic downturn in which unemployment topped 10 percent. That recession ended in the fourth quarter of 1982. In the subsequent two years, investment spending grew by a total of 54 percent. By contrast, in the first two years of this recovery, it grew by half that amount.

• While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story. Business investment has also been weak. Over the last two years, nonresidential fixed investment has grown by only 12 percent, whereas during the two years after the 1982 recession, it grew by 27 percent. Similarly, the narrow category of spending on business equipment and software fell more than twice as much in this recession as it did in the 1982 recession, and it has been slower to recover.

I think the second point is a partial response to some of the comments in the prior thread. A look at Mankiw's proposed policies to address this problem suggest that he's on the same general page as Bob.

Comments

[Jerry O'Driscoll]

I am glad Steve Horwitz isn't letting go on private investment.

Investment is the only spending that can reproduce itself. Profitable investment generates the incomes required to sustain itself.

That has been economic orthodoxy from Adam Smith's time to the present: in classical and neoclassical economics. It is not a special Austrian point. And, if I need say this, this is a microeconomic proposiiton.

Certainly there are models in which consumption can drive investment and incomes. An accelerator model is an example.

That view crashes up against J. S. Mill's fourth fundamental poposition respecting capital: "Demand for commodities is not demand for labour." It has been discussed here (CP) at length. Hayek discussed it at length in Appendix III of The Pure Theory of Capital.

I'm not going to reproduce the argument here. The conclusion is basic: the proposition that demand for commodities is always demand for labor violates the economy-wide resource constraint.

Why is this important here? Those superficially familiar with the proposiiton will say that it only holds at full employment. Not so, as our current experience illustrates.

If consumption comes at the expense of investment, or without a corresponding increase in investment, there will be no increase in the demand for labor. The dearth of investment is the reason firms aren't hiring. Pretty basic stuff.

Why aren't firms investing? We can argue about that. I think Higgs' has a plausible theory (regime uncertainty). Others may offer up something else.

My view is that capital is on strike. Capital goes where it is rewarded, and flees when it is punished. The president wants to redistribute savings and punish capitalists.

Regardless, as long as capitalists are reluctant to invest, they have no reason to hire. Deficit spending and "stimulus" just further frightens capitalists.

[Steve Horwitz]

"Capital is on strike"

So owners of capital have simply decided that enough was enough with the whole "sanction of the victim" thing, even though they lack the uber-mench with the moral vision to explain to them why that's the right thing to do? :)

[Allan Walstad]

1. I strongly recommend Strigl's _Capital and Production_. Capital maintenance requires a supply of saved consumer goods ("subsistence fund") or stream of consumer goods to support those who are making capital goods. Artificial stimulation of increased consumption undermines capital maintenance, not to mention new capital formation. Anything else that discourages entrepreneurship, or distorts the information available to entrepreneurs, undermines future growth. Recognition of the underlying physical reality must take precedence over arguments based on money and how it is spent.

2. Why aren't firms investing? Perhaps they have finally learned the lesson that capital projects stimulated by artificially low interest rates are being set up to fail. Regime uncertainty is another stumbling block. But I wouldn't characterize the current situation as a capital "strike." When labor unions strike, the issue is something like X dollars income versus 1.1X. For entrepreneurs and investors evaluating possible capital projects, the range of possibilities includes losing everything.

[Bill Woolsey]

O'Driscoll:

I have had a good bit of exposure to microeconomics over the year, but never was Mill used as the cannonical text.

I am sure that Mill was onto something when he argued that a demand for commodities cannot be a demand for labor, but standard micro has the demand for labor being equal to the marginal revenue product of labor. Some of those products are consumer goods. And some of those revenues are revenues from from consumer goods.

If all you mean is that paying wages now to workers producing consumer goods is an investment that is paid off when the consumer goods is sold--then fine.

It seems to me that many firms are making massive amounts of these investments right now. What strike?

I think it is much more likely that the reason they don't make more of such investments in labor to aid with the production of consumer goods is that they doubt they can sell the additional consumer goods.

Does anyone really believe that there are shortages of consumer goods because firms don't want to invest in the labor to produce them?

I could sell more output, but I just don't want to because I am on strike?

Wow.

[Jerry O'Driscoll]

Bill,

I would appreciate it if you stop being snide in your answers and stop putting words into my mouth. The last half of your post is made up out of whole cloth and not related to anything I said.

If you want to discuss the issue of Mill's proposition, at least please read it (or Hayek on Mill) -- instead of trying to guess what it really means. You don't understand the argument.

In fact, Hayek contrasts Mill's analysis with the derived demand for labor. Which is correct is the point of contention.

If you want to dispute Steve's data on investment, please provide your source. Steve gave his in the original post. But asserting there are "massive" amounts of investment is bluster, not an argument.

[Steve Horwitz]

What Jerry said Bill. The microeconomics of derived demand is true of any particular market, but cannot be true in all markets simultaneously. To think otherwise is to fall for the fallacy of composition. That was Mill's point and why Hayek rescued that idea in the debate with Keynes. I make this point in my recent Keynes-Hayek debate paper:

This element of the Keynesian vision helps to understand why Hayek argued that Keynes had not understood what Hayek called “Mill’s Fourth Postulate” or the idea that the “demand for consumption goods need not increase the demand for investment goods.” Of course at a microeconomic level, the idea that the demand for a specific consumption good will increase the demand for the specific capital goods that are required to produce it is true enough, and comes right out of the Menger and the Austrian tradition. However, to think this is true of an aggregate increase in the demand for consumption goods is to fall for the fallacy of composition. If households have higher time preferences and begin to shift more of their income to current consumption expenditure, it does not, argued Hayek channeling Mill, increase the demand for all investment goods. In fact, the reduction in savings necessary to finance the increased consumption will reduce the demand for some kinds of capital by shifting resources closer to the final stages of production. Reduced savings requires a restructuring of capital and the early stage capital goods will bear the brunt of the reduction in demand and fall in value, as will the labor complementary to them. In order to see this, one must have the kind of disaggregated conception of capital that was part of Hayek’s vision of intertemporal coordination. Only where capital is seen as having a limited number of uses and where it must fit into a structure of other capital goods will one realize the truth of Mill’s Fourth Postulate and best understand why believing that consumption and investment move in tandem and not trade off is mistaken.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1801532

[Bill Woolsey]

Steve:

To me, this is macroeconomics. As you say, from a microeconomic perspective, the demand for resources depends on the demand for products. Exactly.

The demand for labor depends on the demand for the products of labor.

If the demand for consumer goods rises, the demand for labor used to produce consumer goods rises.

I will read your paper.

However, please consider the following--

The market interest rate is above the natural interest rate.

The supply of saving can decrease and demand for investment rise simultaneously, raising the natural interest rate towards the current market rate.

Your brief explanation here appeared to consider a decrease in the supply of saving and an increase in the natural interest rate. In that situation, the demand for capital goods doesn't rise.

I don't really see what is the problem with orthodox theory. The higher consumption (expected future consumption, really) raises the demand for capital goods. The higher interest rate reduces the present value of those future revenues.

Ignoring that saving isn't prefectly inelastic with respect to the interest rate, the natural interest rises enough so that resources are released from the production of captital goods to produce the consumer goods implies by the increase in the supply of saving.

Yes, I realize that the demand for some sorts of capital goods rise and others fall.

By the way, I think that an increase in expected future consumption expenditures will raise the natural interest rate. I don't really see this as a current increase in consumer demand expected to persist into the future.

[Pietro M.]

The CPI has been outpaced by the PPI since 2003, except at the bottom of the 2009 crisis. If firms use PPI items as inputs and produce CPI items as outputs, their profitability has been reduced sharply, i.e., the natural rate of interest has been annihilated by cheap credit.

This is just a proxy, maybe more reliable than the meaningless output gap data (the potential output is overestimated during the boom, otherwise it wouldn'be a boom) and productivity data that are systematically overestimated during an unsustainable boom.

It doesn't seem very profitable to produce. Considering also labor costs that have not increased sharply but neither have fallen, probably firms don't have many resources to assume employers.

If we add a renewed risk aversion, the crowding out of investments by a 10% public deficit, low personal savings, the risk of heavy tax hikes due to the unsustainability of public finances, the pitiful state of public finances, and the now common knowledge that populist macroeconomic policies are no longer effective in creating unsustainable booms as they were in the last 20 years, what's surprising in the stagnation?

And if consumption keeps on being an extremely high percentage of GDP, where are the resources to fund investments? Foreign funds are not even sufficient to fund half of the public deficit.

It is true that with zero interest rates it is possible to make paper profits by simply forgetting about capital costs, but with all the evidence this no longer leads to a boom, although unsustainable.

[Daniel Kuehn]

re: "The CPI has been outpaced by the PPI since 2003, except at the bottom of the 2009 crisis."

So given the last he-said-she-said on here (before this one) about homogeneity and heterogeneity, is anyone going to complain about Pietro using these aggregates or will that only crop up when an argument is made that people don't like.

[Bill Woolsey]

Steve:

I read your paper.

I even read the Pure Theory of Capital years ago.

I am not really that interested in looking up Mill. Nothing in Steve's paper implied that the demand for commodities isn't a demand for labor.

Like I said before, I am sure there is some element of truth in Mill's argument, but I think I will go with standard micro on this count.

I am not pursuaded that firms enjoying an increase in the demand for consumer goods are failing to hire and expand production because they are refusing to purchase capital goods.

I don't think that the debate between Keynes and Hayek was very relevant.

I wasn't arguing that all the capacity prepared for home construction will become fully employed because homes are an input in the production of consumer goods. And so, an increase in the demand for consumer goods will result in added demand for houses. Housing construction will pick up, and unemployed construction workers will go back to work. No, I didn't say that.

I do think added demand for consumer goods would result in added demand for houses because the some of the employed workers will buy houses. While I don't think this would raise housing demand to its previous peak, at some point, that peak will be surpassed. In a growing economy, the demand for most things grow.

In the _special scenario_ where there is no excess capacity in consumer goods industries, but there is excess capacity for producing the wrong type of capital goods, then an increase in the demand for consumer goods won't expand output, at least not in the short run.

But please provide some evidence that consumer goods industries are fully employed, expanding production as fast as they can, and facing resource constraints. (We can't keep up with sales. We can find the workers, but we just can't get the specific capital gear we need.)

The "we can't find the capital gear" doesn't seem to fit into the polling data. It is more like, sales are slow, so we aren't expanding production or employment. Or, sales are good now, but we aren't hiring more because we worry that the situation is temporary. We will wait and see if the current level of sales is maintained.

A committment to getting consumption spending back up to its previous growth path, and then doing it, would seem like the answer.

The flow of money expenditures on output is 14% below the trend before the recession. And it has fallen about the same for consumer goods and services.

If spending on consumer goods was on a higher growth path than before the recession, and it was just spending on housing that was on a lower growth path, then the analysis would have some bite. (It isn't that complicated, really, the sum of spending on all types of goods should just be on the same growth path.) I wouldn't argue that shifting total spending to a higher growth path would permanently raise the demand for housing relative to consumer goods and services and end structural unemployment.

If we had already had sufficient deflation in prices and wages so that real spending on consumer goods was back on its prior growth path (or higher), but it was just real spending on housing that was on the lower growth path, then I would have doubts that raising nominal expenditure would do much good. The price and wage growth path would have already adjusted to a lower level consistent with the reduced flow of money expenditure.

These arguments that capital is on strike have next to nothing to do with debates between Keynes and Hayek.

Capital on strike causing low employment is almost exactly naive Keynesian economics. It is just a motivation for the low animal spirits. What goes wrong with interest rates and the role of monetary disequilibrium--what is necessary for Keynes to make any sense--is just ignored.

[Pietro M.]

D. Kuhn. That is why I talked about proxy, it is not surely a model of how the economy works, but it sheds light on a fundamental process linked to heterogeneity: relative prices.

This is a proxy that at least considers some productive structure, thus a better proxy than the useless standard macroeconomic thinking. Let's take as the least complex view of production that enables relative price arguments instead of aggregate demand and aggregate financial accounting (i.e., M or MV) arguments which have no role in explaining the present ailments of the economy.

The problem I was trying to pinpoint is: what is the microeconomics of investment choices? Relative prices are key, and CPI/PPI is the least worst indicator I can think of.

[Daniel Kuehn]

I have no problem with it Pietro. I just find it confusing what is and isn't legitimate. When I talk about "investment" it's presumed to be homogeneous, and yet this post is talking about "investment" and you see all kinds of Austrians model aggregated investment. Same with inflation - it's a concept which itself is considered suspect by some people depending on who is talking about it.

As for this: "This is a proxy that at least considers some productive structure, thus a better proxy than the useless standard macroeconomic thinking."

I hate to break it to you, but differentiating between producer prices and consumer prices for precisely the reasons you present here (relative price differentials) is standard macroeconomic thinking.

[Troy Camplin]

Standard macro has done SO well, I think one should go with it rather than consider alternatives. Of course, there is the equally absurd claim that the market interest rate is *above*(!) the natural interest rate. That is absurd on the face of it. I suppose standard macro tells you that as well.

Modern macro isn't even wrong.

[McKinney]

George Reisman sheds some interesting light on the subject when he shows that capitalists determine the level of investment by their decisions to consume more or less. It’s a very interesting perspective.

And consider Hayek’s Ricardo Effect, which is nothing more than the application of the micro econ PPF depicting the trade offs between capital and labor. If monetary pumping or government spending increase consumer spending, consumer goods producers will employ more labor, at first by having employees work longer hours.

Those policies will not increase demand for capital goods, especially not houses and cars. And yet the greatest unemployment is in capital goods production, not consumer goods production.

Stimulating demand for consumer goods can only help employment in consumer goods industries. It does not stimulate demand for capital goods where unemployment is highest.

[McKinney]

Troy, Bill is using a different definition of natural interest rates. The one I learned in school had to do with the rate of interest that kept price inflation at zero. So I guess there are multiple definitions of the term out there. That shows the importance of defining your terms.

[Silvano Fait]

Keynesians draw from their analysis the conclusion that any decline in private investment can be counteracted by government investment (spending) and this will compensate for any decline in profits and perhaps even raise them.
Well, I think profits and expectations about them are the causal variable. Government competes with the private sector bidding up resources: it hurts profitability in real term. If the government deficit is maintained or increased, it "eats" into the profit available for financing new private investments: it does not increase corporate profits, only income.
If governments run deficits and run up debt, this debt must be serviced through interest payments to banks and other financial institutions. Debt servicing costs (interest and repayments) must either be met through taxes or through monetary expansion reducing real incomes for creditors. Payment can be delayed by raising even more debt to repay old debt but there is no free lunch: debts must be paid or written off.
During the slump, businesses slash back on costs, laying off labour, closing down plant and liquidating malinvestments: these are the seeds for the recovery. When private sector starts to gain new profits, even at lower level of demand and production, then investments begin to start again. Firms did not start cutting jobs in the beginning because there was ‘not enough final demand’: they did so because profitability fell so much that it hurted the solvency of the companies. At best, government spending Keynesian-style, can only be a substitute for failing private investment and consumption just for a very short while. Ultimately, it is a burden on free market not its saviour.

[Troy Camplin]

When the Fed is actively manipulating both the money supply and the interest rates, how can anyone even know what the natural interest rate would be? How can one then reasonably say that interest rates are above it? Or below it?

My suspicion is that many people are doing like me and not spending because they are desperately trying to pay off their debts. That result in people neither saving nor spending. When people are trying to get out of a hole, throwing them better shovels isn't going to convince them to dig deeper. Which is why I don't buy that interest rates are higher than the natural rate.

[Rob R.]

I understand Mills point that a general increase in demand for consumer goods will not lead to an increase in production precisely because the increased consumption will divert resources away from production.

Jerry O'Driscoll then says:

"Those superficially familiar with the proposiiton will say that it only holds at full employment. Not so, as our current experience illustrates."

I'm not sure I understand this. Assuming we are not at full employment and at some stage people start reducing their cash balances in order to spend on consumer goods would this not increase the price of those goods, increase the margins for producers and spur increased production ?

Bill offers the following possible explanation: "In the _special scenario_ where there is no excess capacity in consumer goods industries, but there is excess capacity for producing the wrong type of capital goods, then an increase in the demand for consumer goods won't expand output, at least not in the short run."

Is it likely we are in such a scenario or are there other reasons (beyond regime uncertainty leading to an investors strike ) that explains the current situation ?

[Jerry O'Driscoll]

Rob R. did not quite get Mill's argument.

There are 3 goods in Mill's analysis: consumer goods, capital and labor. If consumpton demand increases, it must increase at the expense of something. If it increases at the expense of labor, then obviously Mill's proposition holds. If it increases at the expense of capital, the proposition also holds.

Like Mill, my extension of his argument did not involve a change in the demand for money.

[Silvano Fait]

Imagine a Big Player (as described by Koppl), whose revenues are firms' profits and workers' wages. Call it "G". It can expand in real term only displacing private investments and consumption.

Profit margin and return on investments are more important than aggregate sales. That's why asset deflation is important: new and lower prices increases profitability of new savings. During the bust it is absolutely normal that business activity starts to recover from a lower level. Printing money and public expenditures both reduce the marginal productivity of private capital. The same holds true for rolling over zombie loans with Fed's help.

[Rob R.]

Jerry O'Driscoll,

Thanks for the clarification on Mill.

I still believe that the bit about cash balances is directly relevant here because it seems likely that part of the reason for unemployed resources is down to prior increases in demand for money unaccompanied by either an increased supply of money or falling prices. Would not an increased consumer demand from reduced cash balances (as demand for money starts to return to previous levels) cause a situation where the proposition might not hold ?

BTW: I am definitely not arguing that we need policies that will encourage increased consumption, just trying to understand the implications of Mill's proposition to the current situation, and better understand what Bill W. is arguing for.

[Jerry O'Driscoll]

Quite independently, in today's "Americas" column in the WSJ Mary O'Grady also states that "capital is on strike." She offers up one example of the ways in which the Obama administration is erecting impediments to investment and hiring.

http://online.wsj.com/article/SB10001424053111904836104576560933917369412.html?mod=WSJ_Opinion_LEADTop

[Bill Woolsey]

Troy:

I actually do think that the market interest rate is above the natural interest rate now. But when I wrote that, I was speaking hypothetically.

You do recognize that the market rate could be above the natural interest rate?

If that were true, then the supply of saving can decrease and the demand for investment can increase, and the natural interest rate rise up to the market rate. Real expenditures on consumer and capital goods can both rise at the same time.

McKinney:

I don't define the natural rate as the one that keeps the price level constant. Rather it is the level of the real interest rate where saving equals investment. It is simultaneously the level of the real interest rate that results in total real expenditure (consumption plus investment) equal to the productive capacity of the economy. It implies a stable trajectory of prices and wages with no net excess supplies or demands tending to shift them from the money side.

O'Driscoll:

I doesn't sound like Mill's analysis is very helpful. Is it really a barter economy?

If firms pay out the gross revenues to their owners (rather than some or all of the profits,) then the owners must reinvest in the firm to make payroll. In standard microecnomics, we don't look at it this way. Right?

If firms retain earnings, that is saving. If firms pay out profits to the owners, they may save them or consume them.

Anyway, consuming 100% of income doesn't require that firms quit paying workers.

Further, the real gross domestic investment that Higgs discussed doesn't include payroll as part of investment.

The reality of the situation is that if the demand for consumer goods rose, and firms sold more consumer goods, they could use the cash flow from those sales to hire workers. They would do so if they found the expansion of sales to be profitable and if they expected the sales to persist.

However, I will grant that this cash flow counts as profit on current operations, and that retaining that fund new hires would be retained earnings and so business saving. It would be matched by goods in process until sold. Or something along those lines.

[Jerry O'Driscoll]

Woolsey,

I'm not dealing with you anymore until you check the attitude.

[Desolation Jones]

McKinney, I haven't heard that definition of natural rate of interest before. I think you're talking about some variant theory of the natural rate of unemployment.

"The one I learned in school had to do with the rate of interest that kept price inflation at zero. "

[Silvano Fait]

@Bill Woolsey
You are talking as if firms were producing the right goods, employing the right mix of capital and labor. As if the capital structure, the financial structure and the price system were ok. As if the only wrong thing were the quantity of goods sold and purchased. Your solution assumes that we are experiencing a recession due or persisting because of underconsumption. I think you are missing the point. Think for a while, how many houses should the Government buys to persuade firms that “the expansion of sales is profitable” and will persist? How many cars? It’s not a problem of idle resources.
There are still a lot of debts and cash flows should be used to pay also interests and principal in order to adjust the financial structure of both firms and individuals. Savings will not be channeled into new fixed assets or into new long term project at older prices even if consumption rises for a while. They are channeled only where the expected return of investment is high enough to compensate a riskier and weaker economic environment without endangering their financial solvency. If new investments don’t produce enough cash flow in the short term, piling up cash is better. Even fire sales are a really great opportunity for healthy companies, but they are prevented by zombie banks continuing to loan to zombie firms or by government’ subsides. You can’t fix a lot of microeconomic problems just passing a bill. You can’t pretend that capital structure is right.

[Troy Camplin]

I'm wondering what definition of "natural interest rate" could make it be above or below the market interest rate when the natural interest rate is identical with whatever the interest rate would be in a true free market. Is it the interest rate handed down to us by God at any given time? Is it the interest rate that would exist in a state of nature untouched by the vagaries of the market? Is it the interest rate that our benevolent government would gift to us if the market weren't messing everything up? Or is it simply a disconnect between what the market rate would be if we'd just leave things alone and what the "market" rate is now, with all the distortions created by the government? If the latter, I don't see how my observations are overturned. Nobody is stupid enough to invest when the government is behaving as ours is behaving. Interest rates don't matter -- drop them to zero, and nobody's going to borrow money, because people are trying to get out of the hole the idiots who think our only salvation is more debt have gotten us into. Since those idiots aren't going anywhere, and aren't going to actually cut anything, we have to save ourselves from our own debt. Unless you start directly paying me to borrow your money, I'm not borrowing any more money. Not in the immediate future, and probably not for a long, long, long time after we finally get everything paid off. Like I said, I suspect most other people are behaving the same way. Anybody who wants to pay off all my debts so I can start spending money in the economy is free to do so. Until then, I am going to behave rationally and not add leeches when I'm losing blood.

[Bill Woolsey]

Fait:

I am not an "underconsumptionist."

In my view, recessions are due to monetary disequilibrium--an excess demand for money.

The usual impact of an excess demand for money will be excessively low consumption and investment. Relieving the excess demand for money will generally result in more consumption and investment expenditure and more production of consumer and capital goods.

None of this is inconsistent with structural unemployment--being set up to produce the wrong thing--or a less effective allocation of investment because finanical markets work worse than usual.

Just keep in mind that the particular set of capital goods that exist are approximately _never_ the ones appropriate to what is being produced now. Structural unemployment exists all the time and not generally due to errors in judging future interest rates.

And for every borrower there is a lender. Assuming money not lent or funds repaid is assuming a growing demand to hold money. That is a possible consequence of deleveraging, but not a necessary one. And, more importanty, an expansion in the quantity of money can offset the effect.

[McKinney]

Bill: “I don't define the natural rate as the one that keeps the price level constant.…. It implies a stable trajectory of prices…”

Which is it? Stable prices or not?

With a fixed stock of money prices will gently fall at the rate of the increase in production.

As someone wrote above, the natural rate of interest in Austrian econ is the rate that would prevail in a free market, which excludes manipulation of the money supply. It is based on time preference, not the supply of money.

Bill: “In my view, recessions are due to monetary disequilibrium--an excess demand for money.”

You’re not even the least bit curious as to why people suddenly demand more money? That’s what strikes me as odd about most monetarists today, including Sumner: they lack curiosity.

You’ll never get agreement on anything with Austrians as long as you insist on a hydraulic model of the economy. Monetarists seem to think that money is like the fluid in a hydraulic system: pull the money lever up and the economy turns up; push the lever down and the economy responds likewise. Humans have no choice in the matter. We respond to the hydraulic fluid just like the hardware at the end of the hydraulic cylinder.

Austrians don’t see the economy as a hydraulic system. Austrians see the economy as being subjective and very human. People respond differently to the same stimuli at different times because people can learn from their mistakes. So while there is a general tendency for people to respond to changes in the money supply because it causes price changes, the response isn’t automatic or exactly the same. And there are long lags between changes in money and the responses of people to it. People often don’t respond in the way monetarists think they should.

The other thing that astonishes me about monetarists if their total and utter denial of lags. Sumner claims that the economy responds immediately through expectations. Yet the empirical evidence for long lags is overwhelming.

[Bill Woolsey]

O'Driscoll:

I will try to be better.

[George Machen]

I thought that it was non-controversial around here that the Natural Rate is ROI.

[Silvano Fait]

There are two definitions of the Natural Rate of Interest (NRI) coined by Wicksell (see Interest & Prices, 1898):

1. The NRI is "the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods".

2. The NRI "is a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them".

Austrians, in a broad sense, usually refer to the first one.