On Austrians and the natural rate of interest

I don't often write about Austrians. As I noted before the reason is that, as a school of thought, Austrians are kind of irrelevant. They are part of the marginalist mainstream, but are often confused as heterodox (sometimes even Austrians don't know that they are neoclassical). In fact, Hayek was for the most part forgotten after Sraffa and others showed the inconsistencies of his theories in the 1930s, and if Austrians understood the consequences of the capital debates, their come back in the 1970s would seem even less reasonable.

Throughout their underground period, from the 1940s to the 70s, they were part of 'secret' societies in which only the initiated (complete adherence to the ideology) could participate, like the Mont Pèlerin Society, and creating think tanks, like the conservative Institute for Economic Affairs (IEA), to promote the laissez faire ideology (note this had no basis in theory, since they cannot prove that markets produce efficient allocation of resources with a uniform rate of profit, but I'll get back to that below).

It was the rise of the conservative movement, a sort of Polanyian reaction to the Welfare State, that brought back all sorts of laissez faire cranks, and brought in the coattails Hayek and his disciples. In contrast to Milton Friedman, that used a fairly regular ISLM cum Phillips curve model, with the added natural rate, Hayek produced no relevant innovation, besides some poetry about the complexity of markets and uncertainty (which is why some confuse him with an heterodox author; blame Shackle for this).

Sissela Bok, the daughter of Gunnar Myrdal,* co-winner of the Sveriges Riksbank Prize with Hayek in 1974, recounts in her biography of her mother Alva [Alva Myrdal, Gunnar's wife received a real Nobel, the peace one in 1982] that the prize was given to Hayek by the Swedish economics establishment as a way to demean the prize. And if this is not enough, the guy that was supposedly for freedom, and for economic freedom because that one is central for political freedom, defended Pinochet. So really there is no economic or moral reason to take Austrians too seriously.

In sum, Austrians are really the most ideological wing of the neoclassical school, with all the other theoretical problems that the mainstream has. There is not much relevant to discuss there. So you might ask what is the post doing here. The reason is that there has a been a debate between Lord Keynes (nope not that one, the author of the very good blog Social Democracy for the 21st Century) and a Spanish Austrian author, and I was asked about my opinion. So here it is.

Some Austrians seem to think that their theory does not require a natural rate of interest. This might be the result of an incomplete understanding of Sraffa's 1932 critique of Hayek, in which he showed that there were as many own rates of interest (Sraffa's term) as commodities. At any rate, in the this recent debate the Austrian author says that in order to have a cycle Austrian don't need a natural rate and that:

"it suffices with showing that there is a mismatch between the term and risk structure that the marginal lenders (savers) are willing to fund and the term and risk structure associated with investment taking place in the economy." Or in Spanish in the original post: "le basta con mostrar que existe una descoordinación entre el plazo y el riesgo de las inversiones que están dispuestos a financiar los ahorradores marginales y el plazo y el riesgo asociados a las inversiones que se están efectuando en la economía."

So basically you need a mismacth between savings and investment. And dude, yes at the actual intersection of these two curves (often well behaved with savings being upward-sloping and investment downward-sloping) is an equilibrium interest rate, that would eliminate the mismatch. That's your natural rate. So, yes Austrians do have a natural rate**, even if they don't know it. Note that the capital debates show exactly that the idea of natural rate of interest inversely related with capital abundance (supply and demand) is not tenable. The poetry on market efficiency depends on being able to prove that. That's why the neoclassical project, and with it Austrians, has been derailed. It is really zombie economics.

* Myrdal coined the term monetary equilibrium to refer to the Wicksellian notion of an equilibrium between the natural and monetary or bank rates of interest. He also was a proto-Keynesian, and the key economist in the initial social democratic governments of the 1930s.

** According to Garegnani, in fact, even the inter-temporal Arrow-Debreu models, which supposedly do not have a uniform rate of profit, require a natural rate of interest to bring about the equilibrium of investment with full employment savings.