Austrian Macro IAustrian Macro I
Intermediate MacroeconomicsIntermediate MacroeconomicsECON-305 Fall 2013ECON-305 Fall 2013
Professor DaltonProfessor DaltonBoise State UniversityBoise State University
Post Post KeynesiansKeynesians
andand
AustriansAustrians
Shared CriticismsShared CriticismsAustrians and Post-Keynesians share four Austrians and Post-Keynesians share four
criticisms of orthodox macroeconomics:criticisms of orthodox macroeconomics:(1) Equilibrium approach overlooks processes of (1) Equilibrium approach overlooks processes of
adjustment;adjustment;
(2) Rational expectations framework minimizes (2) Rational expectations framework minimizes fundamental uncertainty regarding the future;fundamental uncertainty regarding the future;
(3) Equilibrium theorizing minimizes attention to (3) Equilibrium theorizing minimizes attention to how historical past influences historical future; how historical past influences historical future; andand
(4) Treatment of economy as if barter with a (4) Treatment of economy as if barter with a numeraire overlooks the effects of money on numeraire overlooks the effects of money on economic relationships.economic relationships.
AustrianAustrianMacroeconomicsMacroeconomics
What is the nature of What is the nature of Capital?Capital?
Austrian macro distinguished by its Austrian macro distinguished by its view of capital and interestview of capital and interest
Nature of capitalNature of capital Heterogeneous structure of goods or Heterogeneous structure of goods or
homogeneous fund?homogeneous fund? Nature of interestNature of interest
What is interest a payment for?What is interest a payment for? How do we conceive of the economic How do we conceive of the economic
process?process? Circular Flow or Means-End FrameworkCircular Flow or Means-End Framework
Austrian Capital TheoryAustrian Capital Theory Capital is the set of heterogeneous, Capital is the set of heterogeneous,
specific intermediate goods that assist specific intermediate goods that assist in the production process – they are in the production process – they are produced but are not ultimate sources produced but are not ultimate sources of consumer satisfactionof consumer satisfaction
Interest originates in the universal Interest originates in the universal preference for current goods over preference for current goods over future goods; it is a payment for future goods; it is a payment for waiting and is central to all time-waiting and is central to all time-consuming processes (production!)consuming processes (production!)
Time and MoneyTime and Money Time is the medium of action in all Time is the medium of action in all
markets.markets. Money is the medium of exchange Money is the medium of exchange
in all marketsin all markets In “macroeconomics,” focus is upon In “macroeconomics,” focus is upon
growth and deviations in growth and deviations in production.production.
Production takes time – as capital Production takes time – as capital goods are turned into consumer goods are turned into consumer goods.goods.
Time and MoneyTime and Money Macroeconomics has to concern Macroeconomics has to concern
itself with capital structure.itself with capital structure. Money is a “loose joint” that Money is a “loose joint” that
binds the supply of capital goods binds the supply of capital goods and the subsequent demand for and the subsequent demand for the corresponding consumer the corresponding consumer goods.goods. Monetarist tight jointMonetarist tight joint Keynesian broken jointKeynesian broken joint
Time and MoneyTime and Money
“…“…capital gives capital gives money time to money time to cause trouble.”cause trouble.”
- Garrison, - Garrison, Time and MoneyTime and Money, p. 8, p. 8
Austrian Business Cycle Austrian Business Cycle TheoryTheory
1.1. Historical TimeHistorical Time
2.2. Heterogenoeus CapitalHeterogenoeus Capital
3.3. Capital StructureCapital Structure
4.4. Non-neutral moneyNon-neutral money
5.5. Coordination failureCoordination failure
6.6. Integration of growth theory and Integration of growth theory and theory of fluctuationstheory of fluctuations
Cantillon EffectsCantillon Effects Where money enters into the economy Where money enters into the economy
mattersmatters Monetary injections and leakages alter Monetary injections and leakages alter
the distribution of wealth and thereby the distribution of wealth and thereby alter relative prices and the allocation of alter relative prices and the allocation of resourcesresources
Money can never be neutral in its effects Money can never be neutral in its effects on production and consumptionon production and consumption
Money is always non-neutralMoney is always non-neutral
Cantillon EffectsCantillon Effects Monetary injections in a modern Monetary injections in a modern
financial system are through the financial system are through the banking systembanking system
Money is “lent into existence” not Money is “lent into existence” not “spent into existence”“spent into existence”
Monetary growth alters the interest Monetary growth alters the interest rate and affects the rate and affects the intertemporal intertemporal allocation allocation of resourcesof resources
Capital and SavingCapital and Saving Financial capital is the available fund that Financial capital is the available fund that
arises from decisions of individuals arises from decisions of individuals businesses to neither consume businesses to neither consume nor hoard nor hoard (=Saving)(=Saving)
Saving is the source of the payment of Saving is the source of the payment of factors of production in time-consuming factors of production in time-consuming production processesproduction processes
The demand for and supply of loanable The demand for and supply of loanable funds determines the equilibrium interest funds determines the equilibrium interest raterate
Capital GoodsCapital Goods Key factors of production are the Key factors of production are the
heterogeneous capital goods heterogeneous capital goods that go into making a productthat go into making a product
Every consumer product has an Every consumer product has an “ancestral lineage” of previously “ancestral lineage” of previously applied factors of production, applied factors of production, including heterogeneous labor including heterogeneous labor and capital goodsand capital goods
Capital GoodsCapital Goods At every stage of the lineage from At every stage of the lineage from
original factors of production to finished original factors of production to finished consumer product, entrepreneurs are consumer product, entrepreneurs are making a decision between current making a decision between current expenditures and expected future expenditures and expected future discounted revenuesdiscounted revenues
When the production process is in When the production process is in intertemporal equilibrium, the discount intertemporal equilibrium, the discount rate will be the equilibrium or rate will be the equilibrium or natural natural interest rateinterest rate
Capital GoodsCapital Goods In order to maintain the “ancestral In order to maintain the “ancestral
lineage” necessary to continue the lineage” necessary to continue the current production of a given consumer current production of a given consumer good, prices paid and received at each good, prices paid and received at each stage of production must continue to stage of production must continue to reflect normal profitability (the discount reflect normal profitability (the discount rate)rate)
Changes in the interest rate change the Changes in the interest rate change the discount rate and therefore change the discount rate and therefore change the relative profitability of different stages of relative profitability of different stages of the production processthe production process
The ABCT StoryThe ABCT Story
Changes in credit can come from Changes in credit can come from either changes in real saving or either changes in real saving or changes in the money supplychanges in the money supply
Changes in credit change the interest Changes in credit change the interest raterate
Changes in the interest rate change Changes in the interest rate change the profitability of different stages in the profitability of different stages in production processes, altering the production processes, altering the intertemporal allocation of resourcesintertemporal allocation of resources
The ABCT StoryThe ABCT Story
Changes in the intertemporal Changes in the intertemporal allocation of resources that arise allocation of resources that arise from changes in real saving are from changes in real saving are sustainable and lead to greater sustainable and lead to greater economic growtheconomic growth No divergence of the actual from No divergence of the actual from
the natural rate of interestthe natural rate of interest
The ABCT StoryThe ABCT Story
Changes in the intertemproal Changes in the intertemproal allocation of resources that arise allocation of resources that arise from changes in the money supply from changes in the money supply are unsustainable and lead to a are unsustainable and lead to a “boom and bust” cycle“boom and bust” cycle The actual interest rate diverges from The actual interest rate diverges from
the natural rate of interestthe natural rate of interest The bust can be particularly painful if a secondary The bust can be particularly painful if a secondary
deflation is allowed to occur and price and wages deflation is allowed to occur and price and wages are rigid downwardsare rigid downwards
Common ConfusionsCommon Confusions An unsustainable boom is initiated by an actual An unsustainable boom is initiated by an actual
interest rate below the natural interest rate.interest rate below the natural interest rate. During an investment boom initiated by changes During an investment boom initiated by changes
in technology, one would expect the demand for in technology, one would expect the demand for loanable funds to rise relative to the supply of loanable funds to rise relative to the supply of savings. This should cause the interest rate to savings. This should cause the interest rate to rise.rise.
If the central bank steps in to moderate interest If the central bank steps in to moderate interest rates, the interest rate might stay the same or rates, the interest rate might stay the same or rise but still be below the natural rate, making rise but still be below the natural rate, making the resulting boom unsustainable.the resulting boom unsustainable.
Policy ImplicationsPolicy Implications
Recessions are the cure for the Recessions are the cure for the misallocation of resources misallocation of resources occasioned by unsustainable boomsoccasioned by unsustainable booms
Control of MV (not just M) mattersControl of MV (not just M) matters Gold-standardGold-standard Free banking and competitive moniesFree banking and competitive monies
Denationalization of money and creditDenationalization of money and credit
Removal of price and wage rigidities Removal of price and wage rigidities can accelerate adjustment processescan accelerate adjustment processes
Criticisms of ABCTCriticisms of ABCT
No real world analog to natural rate of No real world analog to natural rate of interestinterest
Capital aggregation problemsCapital aggregation problems Dependent upon expectational lags Dependent upon expectational lags
(not consistent with rational (not consistent with rational expectations)expectations)
Overemphasis on interest rate Overemphasis on interest rate miscoordinationmiscoordination
Unpopular policy prescriptionsUnpopular policy prescriptions
Strengths of ABCTStrengths of ABCT
Austrians claim that theirs is the only Austrians claim that theirs is the only theory that predicted the Great theory that predicted the Great Depression (Lakatosian novel fact)Depression (Lakatosian novel fact) (not true of the “Great Recession”)(not true of the “Great Recession”)
Rational individual behavioral Rational individual behavioral adjustments to changed relative adjustments to changed relative pricesprices
Importance of knowledge and Importance of knowledge and expectations in a complex worldexpectations in a complex world
Distinguishing BeliefsDistinguishing Beliefs
1.1. Expectations are forward-looking but Expectations are forward-looking but each individual agent possesses each individual agent possesses unique, diverse and partial unique, diverse and partial knowledge-information sets; knowledge-information sets; coordination failures are possiblecoordination failures are possible
2.2. Economy has a tendency towards Economy has a tendency towards intertemporal equilibrium output and intertemporal equilibrium output and employment through entrepreneurial employment through entrepreneurial adjustments to relative pricesadjustments to relative prices
Distinguishing BeliefsDistinguishing Beliefs
3.3. Cantillon effects assures non-Cantillon effects assures non-neutrality of money in short and neutrality of money in short and long runlong run
4.4. Discretionary fiscal and monetary Discretionary fiscal and monetary policy increase uncertainty and policy increase uncertainty and increase likelihood of coordination increase likelihood of coordination problems; rules are preferable to problems; rules are preferable to discretion and automatic institutions discretion and automatic institutions are preferable to rules.are preferable to rules.
