My Paper (co-authored with Paul Zimmerman) on Hayek and Sraffa

I have just uploaded to the SSRN website a new draft of the paper (co-authored with Paul Zimmerman) on Hayek and Sraffa and the natural rate of interest, presented last June at the History of Economics Society conference at Brock University. The paper evolved from an early post on this blog in September 2011. I also wrote about the Hayek-Sraffa controversy in a post in June 2012 just after the HES conference.

One interesting wrinkle that occurred to me just as I was making revisions in the paper this week is that Keynes’s treatment of own rates in chapter 17 of the General Theory, which was in an important sense inspired by Sraffa, but, in my view, came to a very different conclusion from Sraffa’s, was actually nothing more than a generalization of Irving Fisher’s analysis of the real and nominal rates of interest, first presented in Fisher’s 1896 book Appreciation and Interest. In his Tract on Monetary Reform, Keynes extended Fisher’s analysis into his theory of covered interest rate arbitrage. What is really surprising is that, despite his reliance on Fisher’s analysis in the Tract and also in the Treatise on Money, Keynes sharply criticized Fisher’s analysis of the nominal and real rates of interest in chapter 13 of the General Theory. (I discussed that difficult passage in the General Theory in this post).  That is certainly surprising. But what is astonishing to me is that, after trashing Fisher in chapter 13 of the GT, Keynes goes back to Fisher in chapter 17, giving a generalized restatement of Fisher’s analysis in his discussion of own rates. Am I the first person to have noticed Keynes’s schizophrenic treatment of Fisher in the General Theory?

PS: My revered teacher, the great Armen Alchian passed away yesterday at the age of 98. There have been many tributes to him, such as this one by David Henderson, also a student of Alchian’s, in the Wall Street Journal. I have written about Alchian in the past (here, here, here, here, and here), and I hope to write about Alchian again in the near future. There was none like him; he will be missed terribly.


13 Responses to “My Paper (co-authored with Paul Zimmerman) on Hayek and Sraffa”

  1. 1 JP Koning February 20, 2013 at 11:40 pm

    Downloading now. I look forward to reading it!


  2. 2 Blue Aurora February 21, 2013 at 3:16 am

    May your mentor, Armen Alchian, rest in peace, David Glasner.

    As for your paper with Paul R. Zimmerman, like JP Koning, I look forward to reading it.

    Speaking of Hayek and Sraffa, however…

    Did you know that Daniel P. Kuehn has an article coming out in a special issue on Friedrich Hayek at a journal called the Critical Review?

    Kuehn’s article is a critique of Friedrich Hayek’s formulation of Austrian Business Cycle Theory. In a future revision of your and Zimmerman’s article on Hayek and Sraffa, perhaps you might want to cite it.*

    *Did I get it grammatically correct? Is it “your and Zimmerman’s article”, or “Zimmerman and your’s article”, or something else?


  3. 3 a.concerned. reader February 21, 2013 at 5:41 am

    In your paper you write, “The problem, of course, is that the natural rate of interest cannot be observable, making Hayek’s policy prescription unoperational.”

    Why do you not consider first the obvious question: Did Hayek reason backwards from a desired result to a theory to support that result?

    IOW, Didn’t Hayek decide that he wanted no policy prescriptions and then create an “argument” that lead to that result?

    After all, he was writing fiction and not science.


  4. 4 Jon Finegold February 21, 2013 at 7:57 am

    Hayek’s response to Sraffa regarding the natural rate of interest could, I suppose, be interpreted as an avoidance of the point. But, what I think Hayek was really trying to do was to move focus away from discussion of interest rates. Movements in the rate of interest are indicative of changes in the volume of credit, but what really matters in Hayek’s cycle theory are the changes in relative prices. Changes in the rate of interest might matter a lot in a strictly Böhm-Bawerkian theory of capital (which Sraffa would later go on to criticize), but I’m not so sure they matter as much in Hayek’s theory — my interpretation of his response to Sraffa is him saying as much, which is why he quickly moves on to Sraffa’s other criticism (which Hayek felt was the most relevant).


  5. 5 Ogallalaknowhow February 21, 2013 at 8:55 am

    What are your thoughts on the interpretation that the confusion in Chapter 17 over money’s “own-rate” was the result of Keynes’s reading of Silvio Gesell’s exploitation theory of interest?

    “Now, the reader of The General Theory, who, most likely, has never heard of Gesell, may want to know why the rate of interest declines most slowly, when all the other definable “own-rates” (e.g. the rates of return for all sorts of commodities, and various types of ventures that are postulated at the beginning of the 17th chapter) may easily plummet and become negative under the pressure of unbridled investment. In other words, why can’t the rate of interest on money ever be negative? Keynes finds himself at a delicate juncture, for in his biased replica of Gesell’s theory of interest, he is at this point sailing close to the unconditional arraignment of imperishable metals, which is a spot he wishes to elude. But by having reduced money to an ordinary commodity and depicted its rate as but one of a myriad envisionable yields, Keynes now has the leeway to discuss with detachment the source of the occasional rigidity encountered in the marketplace, which, as he learnt from Gesell, is, of course, gold. Notice the subtlety: unlike Gesell, Keynes does not suggest that gold usurped the symbolic nature of money, reified its function, and thereby demanded a toll for its usage; he affirms, instead, that amongst many commodities money is one, which chanced to be gold by way of traditional practice, and that the physical properties of the metal may at times be expected to obstruct the free flow of trade.”

    Guido Preparata, “On the Art of Innuendo: J. M. Keynes’s Plagiarism of Silvio Gesell’s Monetary Economics.” Research in Political Economy (20): 238.


  6. 6 JP Koning February 21, 2013 at 9:26 am

    David, excellent paper.

    “Keynes’s… Chapter 17…was actually nothing more than a generalization of Irving Fisher’s analysis of the real and nominal rates of interest”

    Just working through the lineage here. So we can attribute to Fisher the original observation that we might observe multiple nominal interest rates in the real world yet only one underlying real rate. He resolved this by showing that if the expected change in an asset’s nominal price is added to the asset’s interest rate then we arrive at its total return, and in equilibrium all returns must be equal. Voila a single underlying real rate.

    We can attribute to Keynes the addition of service flows like liquidity to the equation. An asset’s service flows, nominal interest rate, and expected price appreciation are all components of its total return, and all returns in equilibrium are equal.

    Where are we now? In thinking about interest rates, does the economics profession use the Fisher version? Has it accepted Keynes’s generalization? Have Fisher/Keynes’s insights become embedded in current thinking? Has any new insights been added to Fisher/Keynes since then?


  7. 7 Rob Rawlings February 21, 2013 at 10:01 am

    Indeed,. an excellent paper.

    Bob Murphy has a paper on the same theme “”

    In that paper Murphy takes the view that Lachman does not adequately address Straffa’s critique of natural rates.

    “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.”

    Based on your paper Lachman was indeed aware that the rate of interest would differ depending upon what you pick as the numéraire. You quote him as saying: “This does not mean that actual own-rates must all be equal, but that the disparities are exactly offset by disparities between forward prices”

    Would you agree that Murphy appears to have mis-stated Lachman’s views in his paper ?


  8. 8 Tom Brown February 21, 2013 at 11:59 am

    Ah! JP Koning… I knew I’d seen you around somewhere before. BTW, Cullen got back to you on your oligopoly and “rules the roost” questions.


  9. 9 Tas von Gleichen February 23, 2013 at 8:37 am

    98 that’s a long live life. May he RIP.


  10. 10 Greg Ransom February 25, 2013 at 12:16 pm

    I’m with Finegold.

    The Sraffa critique seems a non-issue for Hayek.

    And besides Lachmann writing decades later, I can’t recall anyone taking note of the Sraffa critique.

    If it had influence, where is it mentioned in the literature of the 1930s or even in the letters and diaries of the 1930s?

    I just don’t recall it coming up. Maybe I’ve simply forgotten some mention here or there, but I’d like to see the specific discussions.

    The claim that the Sraffa paper had a significant role in what people wanted to grab on to in order to advance their careers is not proven.

    The big issue is that the British, Germans & Americans had no grasp of Bohm-Bawerk’s simply logic of choice insight, no one will extend the length of a production process unless it promises superior output. This thought is simple outside the realm of the thinkable for the British, German and American economists.

    This is the only explanation everyone’s not laughing Keynes out of economics for his fallacious & uncomprehending remarks on the Hayek/Bohm-Bawerk logic of saving/production across time.

    And the didn’t much get the idea of originary interest either — their understanding of the problems of interest simply come out of a different world.

    What they could understand was the math of Bohm-Bawerk’s aggregated concept of the average period of production — something Hayek identified as not central to his theory but a not fully adequate expository aid that would need to be replaces.

    And this math construct attracted the attention of young economists with a normal science puzzle to advance their career exploring — which they did.

    It turned out to be exactly the bust Hayek always anticipated it would be — even worse actually.

    Some folks assumed Hayek’s work depended on the construct — now *that* had impact.

    What also had impact was Kaldor’s aggregated, magic-based, non-Hayekian/Marshallian take on the ‘Ricardo Effect” — folks thought that Kaldor had shown that forced-savings artificial booms were plausibly sustainable, they failed to see the magic knowledge/coordination assumptions hidden by the fallacies of aggregated Marshallian economics.


  11. 11 Bob Murphy February 26, 2013 at 4:01 pm

    Hi David, just wanted to make sure you saw my snarkiness. But for real, I’m curious about your reaction.


  12. 12 David Glasner February 28, 2013 at 2:32 pm

    Bob, I have just done a post explaining why we don’t agree. The difference on this point is small, but I think it is real (no pun intended).


  1. 1 Is There Such a Thing as the “Natural” Rate of Interest? | Monetary Philosophy Trackback on February 24, 2013 at 9:05 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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