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5. In your view, does Capital-based
macroeconomics have any point where it could be
improved or that needs further researches?
I think the improvements are mainly
at the empirical stage-looking in detail at historical
events interpreted in light of the Austrian theory.
The objective is to find historical aspects that
allow clear distinctions among the Austrian view,
the Monetarist view, and the Keynesian view. There's
an often-cited paper by Charles Wainhouse ("Emperical
Evidence for Hayek's Theory of Economic Fluctuations,"
in Money in Crisis: The Federal Reserve, the Economy,
and Monetary Reform, Barry N. Siegel ed., Cambridge,
MA: Ballinger Publishing Co., 1984), showing that
in the post-war period, movements of the aggregates
were consistent with the Austrian theory. Fine,
I think they were, but those movements could also
have been consistent with Monetarism and Keynesianism,
too. So we need something that more convincingly
discriminates.
Also, it is hard to come up with
data that track the separate aspects of a disaggregated
capital structure. For two reasons: one is that
postwar macroeconomic data were collected with
no regard for the Austrian theory. Simon Kuznets
designed the US data-collection system with the
Keynesian theory in mind; Richard Stone did the
same thing for the UK data-collection system.
A second reason is that capital
has no natural unit of account. Data on capital
investment, even if disaggregated into early-,
middle-, and late-stage capital, are recorded
in value terms. And those capital values reflect
the then-prevailing rate of interest. It is essential
to the Austrian theory that interest rates are
artificially low during the boom. Hence, capital
creation discounted on the basis of artificially
low interest rates would be artificially high
just as a matter of measurement.
You always get tangled up in these
thorny issues of the capital theory. Back in 1930s
a lot of the debates were about capital theory
(Robinson, Sraffa, etc.). One of the reasons that
Keynes's theory had so much appeal is that it
pushed forward on the issues of unemployment and
stabilization policy while leaving the thorny
issues of capital behind.
For modern Hayekians, it is tempting
to go back and find the evidence of those movements
of capital among the different stages of production.
But the notion of stages, as conceived by Hayek,
is essentially a pedagogical tool. The stages
have no unambiguous real-world counterparts. That's
why we need some innovative empirical research-to
get a handle on the temporal dimension of the
structure of production.
6. Do you have any interesting
anecdote about your relation with neoclassic economists?
I have had communications with Milton
Friedman in regard of his "plucking model"
that I discuss in Chapter 11 of my book. There's
a revealing story about this particular face of
Monetarism that hasn't been told. Back in the
late 1980s, Walter Block, then coeditor of the
Review of Austrian Economics, asked Friedman to
write an article outlining his objections to the
Austrian theory of the business cycle. Friedman
declined, claiming that he had already done that,
and didn't have anything more to say about it.
Block, being as persistent as is usual for him,
wrote back saying he didn't know about this contra-Austrian
article.
Friedman then indicated that it
was all in a preliminary report he wrote while
at the NBER (National Bureau of Economics Research)
in 1964 (which turned out to be the first time
and possibly the only time he had mentioned his
"plucking model"). He qualified his
earlier claim, saying that he hadn't actually
mentioned the Austrian school or any of the Austrian
economists by name but that the Austrians should
have recognized that it was their theories being
criticized. In a short section of the report Friedman
indicated that it was not so much that the Austrians
were wrong with their logic, but rather that their
theory had no empirical counterpart. To Friedman,
the aggregate data cast a grave doubt on those
theories that see as a source of a deep depression
the excesses of the prior expansion. What you
find empirically are not "boom-bust"
episodes but rather "bust-boom" episodes,
the later being described by his "plucking
model": The macroeconomic aggregates are
plucked below trend at various times and to various
extents.
So, this was supposed to be a critique
of the Austrian theory. Walter sent the correspondence
to me just as I was preparing a conference paper
with the title "Is
Milton Friedman a Keynesian"? I included
only a short section on this business of "plucking"
because I thought it was a little inappropriate
to saddle Friedman with a position he took in
some preliminary report back in '64. After all,
the short-run/long-run Phillips curve analysis,
which stands in contradiction to plucking, came
out in the late 1960s. I'd never before seen the
plucking model, but there he was, and so I included
an assessment, focusing on Friedman's high level
of aggregation, and suggested that the data are
not at odds with a theory-the Austrian theory-that
works at a lower level of aggregation.
That was that, or so I thought.
But as things developed, Friedman, who had not
been active in monetary economics for years, was
asked to appear on a panel at the Western Economic
Association meetings, where he would be honored
on the occasion of his eightieth birthday. So,
with plucking on his mind, he took that section
from the old 1964 report and reformatted it as
a conference paper to be presented anew in 1992.
Though about ninety percent of the
paper was excerpted from the old report, the Western
Economic Association's journal, Economic Inquiry,
ran it as the lead article. That was in April
of 1993. One of the few amendments he made was
the identification of the intended target of the
criticism. He inserted in brackets the statement
that "the Mises cycle theory is a clear example."
That is, Mises has a boom-bust theory, which is
immediately suspect because Friedman's aggregated
data suggest a bust-boom sequence.
Well, the important thing to me
was that Friedman had given currency to the argument
and had pointed a finger at the Austrians. That
gave me an opportunity to write a comment
defending the Austrians against this monetarist
critique. In the process I had some correspondence
with Friedman. The focus soon turned to the movements
in interest rates during the 1920s-with Friedman
claiming that they were not low by historical
standards. This was supposed to be further evidence
against the Austrian theory. But, of course, the
1920s were years of rapid innovation-in automobiles,
home appliances, and processed foods. So, we would
expect to see a high demand for investment funds
and a relatively high rate of interest. The "artificial"
component of the boom came from the Federal Reserve's
credit expansion, which kept interest rates below
the true scarcity value of capital. By the way,
this was Hayek's position at the time. He watched
the Fed pump money through credit markets to keep
prices from falling in this period of increasing
output and labeled that policy "artificial
price-level stabilization."
I argued in my comment that Friedman
had misidentified economic recoveries as booms
and had failed to identify any credit-driven booms
because of his excessively high level of aggregation.
Artificially low interest rates affect the relative
movements among the different stages of production-an
effect that is concealed by combining the output
of all the stages into aggregate output. And I
showed that the Austrians' boom-bust sequence
identified at one level of aggregation leaves
a trail of bust-boom data at a higher level of
aggregation.
For a time, I thought that Economic
Inquiry was not going to publish my comment. One
referee vehemently argued against its publication-on
the grounds that Friedman's article should never
have been published! Fortunately, the journal's
editor took a different view and accepted the
comment. It came out three and half years after
Friedman's article (in October 1996).
In Time and Money I gave myself
more space to deal with these issues. I dealt
with a few Friedman-inspired papers that tried
to test for plucking using post-1964 data from
various countries. And I actually drew for the
first time-Friedman never drew it-this infamous
plucking model.
7. Those who are familiar with
the Mises Institute and regard Roger Garrison
as one of the pillars of the new wave of academic
research it supports consider your visit to LSE
as a Hayek Fellow as a big event. This is the
place were Hayek presented his Nobel-prize winning
theories. But it is also the most important neoclassic
academic institution in Europe, so this is a big
thing for Austrians. How did it happen?
This visit was arranged by Toby
Baxendale, an LSE alum and a very successful businessman
in London. He follows the Austrians in his own
reading and has a special interest in Mises and
Hayek. Toby is also a supporter of the Ludwig
von Mises Institute, which is located in Auburn,
Alabama (USA) and is associated with Auburn University.
The five-week visit, then, was spondored by the
Mises Institute in cooperation with LSE. The host
for the visit is STICERD (Suntory and Toyota Centers
for Economics and Related Disciplines), which
is located here on the top floor of the Lionel
Robbins Building. If things work out, there will
be other Hayek Visiting Fellows in future years.
I might mention that, for a few
years now, LSE's economics department has had
a Lachmann Chair-named for Ludwig M. Lachmann,
who was a student of Hayek's and who spent most
of his career at the University of the Witwatersrand
in South Africa. During the academic year 2001-2002,
that chair was held by Bruce Caldwell, who is
now the general editor of the Collected Works
of F. A. Hayek, an ongoing project of the University
of Chicago Press.
8. What are the priorities in
the research field of the Capital-based macroeconomics?
In Time and Money, the exposition
is all about a closed economy. That's where you
have to start, I think. I didn't try to factor
the international sector into the graphics. But
I've already seen some of my students trying to
apply my graphics to a multiple-economy setting.
It would be possible-and I believe it would be
good thing-to create an open-economy version of
the graphics. Also, John Cochran of Metropolitan
State in Denver, Colorado, has been putting the
basic graphics through their paces to deal with
combinations of preference changes and policy
reactions that I didn't deal with in my book.
I think that's good, too.
9. In US they are in a big time
credit expansion…what's going on?
The Federal Reserve and the Bush
administration are simply fighting the market's
attempt to adjust to the excesses of the prior
boom. But by fighting the market, they're making
things worse. The exceedingly low interest rates
give no incentive for businesses to liquidate
malinvested capital. Some capital has been committed
to projects that are now not panning out. But
why liquidate if you can carry the capital forward
at low interest rates, hoping for better times?
Also, the low interest rates are stimulating consumption.
People are refinancing their mortgages and spending
the windfall. The policy-induced spurt in consumption
is even being seen as a sign of a new economic
expansion. But, of course, it's just the Federal
Reserve trying to keep the market for recovering
from the earlier expansion.
10. Professor Huerta de Soto thinks that the
Fed is going to print whatever is needed, indefinitely.
Does it imply a change in the monetary system?
Should we be worried of a coming apocalyptic financial
crisis? Someone speaks of Japanization…
The Fed seems to be totally preoccupied
with preventing deflation. One of the newer Federal
Reserve Governors, Ben Bernanke, adopts the old
Irving Fisher view known as debt-deflation-which
just means that if prices fall when debt levels
are high, the economy is in trouble. Well, prices
did fall in the 1930s when Irving Fisher was deeply
in debt, and he was in trouble. Randall Parker
has recently published a book titled Reflections
on the Great Depression. Parker interviewed all
the old economists who lived through the depression
and asked them why it happened. Bernake wrote
the foreword. It's a revealing and-though not
so intended-a comical account of the thinking
at the time. Parker totally misunderstands the
Austrian view. I wrote a review article for The
Independent Review.
I see the Federal Reserve as fighting
a market correction and, in effect, trading depth
for duration. In other words, by keeping malinvested
capital from being liquidated on a timely basis,
the Fed simply prolongs the period of liquidation.
And, of course, this is more or less what the
Bank of Japan has done.
So, what should the Federal Reserve
do? The work Hayek did here at LSE in the 1930s
suggests that the once the bust comes, the central
bank should allow interest rates to rise enough
to get the needed liquidation but not so much
as to send the economy spiraling into a self-reinforcing
contraction. Of course, actually implementing
that policy may push the so-called art of central
banking to its limits and even beyond. And, making
matters worse, short-run political considerations
all weigh on the side of keeping interest rates
low. These are the considerations that cause modern
Austrians-Hayek, too, starting in the 1970s-to
prefer reform in the direction of a decentralized
banking system: Let competitive forces of the
marketplace keep the supply of money-and of credit-in
line with demands.
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