2. Hayek - Sraffa debate and the fallacy of the “natural
rate of interest”
The debate between Friedrich von Hayek, perhaps the most prominent
representative of the Austrian School in the twentieth century, and Piero
Sraffa, Italian economist who founded the Neo-Ricardian school, on the problem
of uniqueness and consistency of the notion of “natural price” was curiously
result (and somehow the continuation) of an earlier discussion between another
two great economists: John Maynard Keynes and Lionel Robbins.
In the early thirties the intellectual environment of the University of
Cambridge (England) was largely dominated by Lord Keynes who, by then, had
already published his Treatise on Money
and was working in The General Theory of Employment, Interest and
Money. The professor Robbins, renowned liberal economist of the time,
disagreed with the ideas of Keynes. However, he had failed to build until that
moment a conclusive rebuttal of them.
It is
precisely in this context that Hayek was invited to Cambridge. Joan Robinson,
considered as the most important disciple of Keynes, describes the event as
follows: “While the controversy about public works was developing, Professor
Robbins sent to Vienna for a member of the Austrian school to provide a counter
attraction to Keynes. I very well remember Hayek’s visit to Cambridge on his
way to the London School. He expounded his theory and covered a black board
with his triangles. The whole argument, as we could see later, consisted in
confusing the current rate of investment with the total stock of capital goods,
but we could not make it out at the time”. (2)
Thereby Hayek’s involvement in the Keynes-Robbins debate began to tip
the balance to the side of Robbins. Keynes would had to overcome such criticism
to continue successfully the project of the General
Theory, but had little success in response: like other English economists,
he had difficulty understanding and replying to Hayek given the little
knowledge we had about the conceptual structure of the Austrian approach. And
that's where Sraffa, with more knowledge of the Austrian tradition and invited
by Keynes in 1927, enters in the debate.
The controversy between Hayek and Sraffa focuses, as has been said, on
the issue of “natural price” which, of course, is central and relevant to the
Austrian Business Cycle Theory since this theory postulates that crises are
caused by Central Banks that artificially determine an interest rate below the
level of the “natural rate of interest”. In 1932, Sraffa published in the
Economic Journal the article “Dr. Hayek on Money and Capital” (3) and the same
year Hayek responds with “Money and Capital: A reply” (4). Subsequently Sraffa
replies with “Money and Capital: A rejoinder”. (5)
Sraffa’s critique is basically an internal critique, i.e., he analyzes
the logical consistency and coherence of the Hayek’s argument. By doing this
analysis Sraffa realize that there are serious logical gaps in Hayek’s theory
and therefore is canceled all the explanatory value of the notion of
"natural price" and also of the notion of “natural rate of interest”.
Specifically, the strongest Sraffa’s attack is to the uniqueness of the “natural
price”. Starting from Hayek’s assumption about that money is merely a medium of
exchange and by introducing the notion of “own rate of interest” for each good,
Sraffa demonstrates the non-uniqueness of the alleged “natural price”. He
writes: “If money did not exist, and loans were made in terms of all sorts of
commodities, there would be a single rate which satisfies the conditions of
equilibrium, but there might be at any one moment as many ‘natural’ rates of
interest as there are commodities, though they would not be ‘equilibrium’
rates. The ‘arbitrary’ action of the banks is by no means a necessary condition
for the divergence; if loans were made in wheat and farmers (or for that matter
the weather) ‘arbitrarily changed’ the quantity of wheat produced, the actual
rate of interest on loans in terms of wheat would diverge from the rate on
other commodities and there would be no single equilibrium rate”. (6)
Thereby, considering the dynamics of the market, if there is only one
disequilibrium between supply and demand of goods, the natural rate of interest
on such goods will diverge with respect to the natural rate of other goods.
Therefore, there is no uniqueness of the “natural price”.
In his reply Hayek, having had to admit the existence of multiple “natural
rate of interest”, however says that they all are “equilibrium rates” (7).
Sraffa is conclusive in showing the theoretical and practical difficulties of
such a response: “Dr. Hayek now acknowledges the multiplicity of the ‘natural’
rates, but he has nothing more to say on this specific point than they ‘all
would be equilibrium rates’. The only meaning (if it be a meaning) I can attach
to this is that his maxim of policy now requires that the money rate should be
equal to all these divergent natural rates”. (8)
Hayek’s attempts to revive the debate were sterile. Sraffa’s critique
was too strong and the Austrian economists had to bear it for decades. In fact,
it was not until 1994 that the prominent Austrian economist Ludwig Lachmann,
defender of radical subjectivism, gave a relevant answer to the Sraffa's
critique pointing out the ability of “entrepreneurial action” to eliminate the
disequilibrium (9).
However, in an important paper in 2010 entitled “Multiple Interest Rates
and Austrian Business Cycle Theory”, the Austrian economist Robert Murphy
recognizes the inadequacy of the Lachmann’s solution: “Lachmann’s demonstration
-that once we pick a numéraire, entrepreneurship will tend to ensure that the
rate of return must be equal no matter the commodity in which we invest- does
not establish what Lachmann thinks it does. The rate of return (in
intertemporal equilibrium) on all commodities must indeed be equal once we
define a numéraire, but there is no reason to suppose that those rates will be
equal regardless of the numéraire. As such, there is still no way to examine a
barter economy, even one in intertemporal equilibrium, and point to “the” real
rate of interest”. (10)
To be continued
References:
2) Joan Robinson, “The
Second Crisis of Economic Theory”, The American Economic Review, vol.
62, Issue ½, 1972, p. 2
3) Piero Sraffa, “Dr.
Hayek on Money and Capital”, Economic Journal, vol. 42, 1932, pp. 42-53.
4) Friedrich
von Hayek, “Money and
Capital: A reply”, Economic journal, vol. 42, 1932, pp.
237-249.
5) Piero
Sraffa, “Money and Capital: A rejoinder”, Economic Journal, vol.
42, 1932, pp. 249-251.
6) Piero Sraffa, “Dr. Hayek on Money and
Capital”, Economic Journal, vol. 42, 1932, p. 52.
7) Friedrich
von Hayek, “Money and
Capital: A reply”, Economic journal, vol. 42, 1932, p. 245
8) Piero
Sraffa, “Money and Capital: A rejoinder”, Economic Journal, vol.
42, 1932, p. 251.
9) Cf.
Ludwig Lachmann, Expectations and the
Meaning of Institutions: Essays in Economics, Routledge Press, London,
1994, p. 154.
10) Robert Murphy, “Multiple Interest Rates and Austrian Business Cycle
Theory”, consultingbyrpm.com, 2010, p. 14.
11) Cf. Friedrich von Hayek, “Theory of
Complex Phenomena”, Studies in Philosophy, Politics and Economics, University of Chicago Press, Chicago, 1967, p. 22-42.
12) See:
Karl R. Popper, La Lógica de
la Investigación Científica, Tecnos
Press, Madrid, 1980.
You can
contact the author of this article in: “Dante Abelardo Urbina Padilla”
(Facebook) and dante.urbina1@gmail.com (email)
