Is Keynes From Heaven or Hell?
Sorry kids–Major Freedom in particular–but I think Keynes is brilliant in Chapter 13 of the General Theory:
It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt for a stated period of time.
As I put it in my neglected dissertation, the rate of interest is an exchange rate between present and future dollars (or euros or ounces of gold or whatever the money commodity is). Austrians wouldn’t explain the exchange rate between the USD and the Japanese yen by reference to “proximity preference,” or the fact that consumers subjective prefer, other things equal, American goods to Japanese goods.
Obviously, I don’t endorse Keynes’ nutjob “socialization of investment” stuff in the final chapter, or any of his policy recommendations for that matter. But on his neutral, scientific assessment of what interest is, I actually agree with him more than Mises.
Believe me, it pains me to say that. I feel like this guy.
🙂
You made my day, Bob!
If the rate of interest is either not determined in the loanable funds market (Keynes’s position) or not solely determined in the loanable funds market (my position and basically every Keynesian since Hicks’s position), you open the prospect of stable underinvestment which leads to stable underemployment equilibria. Feels free to take your libertarian politics or public choice quibbles to that and oppose Keynesian policy, but that is the analytic point.
Although actually I’ve wavered on whether I agree with Hicks on this…
…doesn’t matter all that much.
What if I think wages are flexible, Daniel? I don’t buy Keynes’ argument from Chapter 2 that workers can’t reduce their real wage demands.
But his business cycle theory isn’t built on wage inflexibility, it’s built on the disconnect between savings and investment.
Right, Keynes’ thinks that workers can’t lower their real wage demands (and thus clear the labor market), because even if they lower money-wages, prices fall and offset it. But I disagree that it would completely counterbalance it, and hence I think the labor market can always clear.
Also be careful with the savings and investment stuff. Keynes actually says that savings necessarily equals investment, in contrast to some other thinkers (in particular the Austrians, if they mean “real” savings). The trick is that if investment is too low, then income falls until saving falls and equals investment.
(I literally just read this stuff yesterday and this afternoon, which is why I’m talking so authoritatively. And Keynes is very explicit on these particular points. I used to think that free market guys thought savings=investment, while Keynes denied it, but it’s actually more like the opposite.)
I would look at Garrison’s Time and Money Garrison argues that in Keynes’ theory whether or not the labor market can clear is irrelevant, because even if it does clear the economy will still be preforming inside the PPF.
The source of Keynes’ alleged drop in AD is a disconnect between savings and investment, which is why he proposes a socialization of investment. The government is supposed to make up for that fall in AD.
Garrison’s take on Keynes, of course, is heavily based on Leijonhufvud’s interpretation.
Which is still a neoclassical interpretation, or one that falls victim to the flaws of neoclassical theory.
You would better off reading
Paul Davidson, 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.
I would say that Leijonhufvud’s interpretation is more Hayekian than Neoclassical.
>But his business cycle theory isn’t built on wage inflexibility, it’s built on the disconnect between savings and investment.
The question is why this disconnect happens and once we know that how it can be solved.
Keynes argues that this disconnect is because of the market (animal spirits). But what we see in reality is that the manipulation of the central bank leads to the banks overleveraging during the bubble phase. When the bubble pops the banks balance sheet is a mess and they are basically broke. So they contract and try to survive. Also, a big part of the population is overleveraged and the rest is usually more frugal with credit.
So basically the transmission from savings to credit is broken because of the situation created by the excesses of the bubble, not because some problem in the market.
And what about the solution? The problem at this point is the banks under the central bank system have the monopolly on credit granted by the government. If legal tender laws are removed and people is allowed to pay taxes in whatever they earn, bascially removing the monopolly on money, an alternative banking system can rise and start transmitting again savings to investment.
In fact, during the Great Depression there was a surge in alternative currencies, and even the Fed has admitted that helped mitigate the depression. It was the answer of the market to the problems created by the central bank. If the government would have removed the regulations that impose a monopolly on money, the alternative currencies and the financial system built arround them would have taken the place (or a big part) of the old and broke financial system that was blocking the transmission.
Another positive outcome of this solution is the fact that the old monopolly currency depreciates because of the new competition, therefore helping the deleveraging process of the old banking system and the people with debt in that currency.
(1) even if wages and prices were perfectly flexible, there would still be involuntary unemployment:
“there are … resting places for saving other than reproducible assets. In our model this is money. … It is therefore not money which is required to do away with a Say’s Law-like proposition that the supply of labour is the demand for goods produced by labour. Any non-reproducible asset will do. When Say’s law is correctly formulated for an economy with non-reproducible goods it does not yield the conclusions to be found in textbooks. As I have already noted Keynes was fully aware of this and that is why he devoted so much space to the theory of choice amongst alternative stores of value” (Hahn 1977: 31).
“One can certainly now see that the view that with ‘flexible’ money wages there would be no unemployment has no convincing argument to recommend it … Even in a pure tatonnement in traditional models convergence to an equilibrium cannot be generally proved. In a more satisfactory model matters are more doubtful still. Suppose money wages fall in a situation of short-run non-Walrasian unemployment equilibrium. The argument already discussed suggests that initially this will lead to a redistribution in favour of profit. The demand for labour, however, will only increase on the expectation of greater sales since substitution effects in the short run can be neglected. If recipients of profit regard the increase as transient (as they sensibly might) their demand for goods will not greatly increase. On the other hand, if wage-earners have few assets their demand will decrease. But that means that producers get a signal to reduce output. Wages continue to fall and prices begin to fall also. Real cash balances increase but expectations about future prices may give a positive rate of return to money. There may be many periods for which falling money wages go with falling employment. Where the system would end up in the ‘long run’ I do not know” (Hahn 1977: 37).
Hahn, F. H. 1977. “Keynesian Economics and General Equilibrium Theory: Reflections on Some Current Debates,” in G. C. Harcourt (ed.), The Microeconomic Foundations of Macroeconomics, Macmillan, London.
http://socialdemocracy21stcentury.blogspot.com/2011/01/f-h-hahn-in-candid-moment-on-neo.html
As for your title question, it turns out he’s from England.
Dang, I was sure it was Hotel California…
I’m from England too. And all of you are wrong ! 🙂
Bob is wrong because funds supplied through holding fiduciary media are still saving and add to the supply of saving. They bring down the rate of interest even though the holder of FM need not promise to hold them for a specific period.
Daniel is wrong because Keynesian liquidity preference theory is a mess. An economy can’t move across the LM curve without changing position on the IS curve because of what I’ve written above in the answer to Bob.
Classical marginalism gives all the answers if you think about it carefully enough.
Anyway, I’m going to write a paper on all this soon and stop being mysterious.
Current, what are you talking about? Keynes’ point was that holding cash is saving, and yet you don’t earn interest on it. So interest isn’t “the reward for saving” after all. At best, it’s the reward for saving-that-doesn’t-consist-of-cash-balances.
I found this is “The Failure of the New Economics” by Hazlitt.
“Jacob Viner has made this point neatly: ‘By analogous reasoning [Keynes] could deny that wages are the reward for labor, or that profit is the reward for risk-taking, because labor is sometimes done without anticipation or realization of a return, and men who assume financial risks have been known to incur losses as a result, instead of profits. Without saving there can be no liquidity to surrender… The rate of interest is the return for saving without liquidity.” Quarterly Journal of Economics, LI (1936-1937), 157.
Rothbard also said to look at this passage,
“In contrast to Keynes’ famous phrase that the rate of interest is ‘the reward for parting with liquidity,’ Greidanus points out that buying consumer’ goods (or even producers’ goods in Keynes’ sense of ‘interest’) sacrifices liquidity and yet earns no interest ‘reward.’ Greidanus op. cit., p.211
Dr. Murphy, I was curious what your response to these kind of criticisms would be. If you answered that in your dissertation then you can just refer me there. I read it when I took your ABCT class but I can’t remember this being talked about in it.
I actually ran through the exact same analogy (with labor) in my head, when deciding whether Keynes’ point was valid. And I think it was.
What does it mean to say somebody might labor and not get wages for it? Do you mean his marginal product was zero? In that case, we would amend the statement to say, “Wages are the reward to productive labor.” If the person is giving a donation of his time, then that’s effectively a contribution of the wage too. There’s nothing analogous going on when you hold cash. You’re not “really” earning interest and then using the interest to go out and buy liquidity. Or at least, that seems a heck of a lot more convoluted, than the way I dealt with cases of somebody giving productive labor and not asking for wages.
As for profit and risk-taking: exactly. That’s why a more precise formulation would be, “Profit is the reward for successful risk-taking.”
More generally, we could take Viner’s defense and do this: I, Bob Murphy, claim that interest is the reward for human action. You might object that there are important cases of people acting without earning interest, but by the same token I could ‘prove’ that wages aren’t the reward for labor.
Bob, I’m not absolutely sure I disagree with you here…
Fractional reserve banks provide free services to the holders of current account balances. Rather than receiving interest they receive services such as money transfers, cheques, debit cards, etc. These don’t necessarily provide an amount of services equal in monetary value to the interest that would be had on a bond, I’m not claiming that. Also, some “current accounts” pay interest though it often isn’t as much interest as a accounts with a notice period.
Even though holding FM doesn’t pay interest it does provide part of the stock of savings. So, it plays it’s part in determining the interest rate because if the demand for holding FM is high and FR banks satisfy it then those banks may not have to pay interest. However, it’s not so cut-and-dried since those banks will have to acquire reserves and provide banking services at the least, they may have to give interest too.
What is the revelation here that not all “rewards” are expressed in money? Much of the “rewards” or gains derived form or action is purely psychic. When holding money, the expected psychic ‘profit’ is simply valued higher then the opportunity cost of not receiving interest if the money was directly invested.
I don’t understand why this fact that not all savings can earn interest somehow posses a problem for the time preference rate of interest.
Mises, but especially Rothbard, always took great pains to also incorporate psychic gains into any part of a theory of arbitrage, including one for the rate of interest. I haven’t ready your paper yet (and I certainly will) but from your comments on this subject, I don’t see anything serious that can poke a hole in the praxeological derived Austrian theory of time preference.
How does your criticism of the pure time preference theory of interest compare to that of Reisman? What do you think of Reisman’s theory of interest?
I don’t know if I’ve ever read Reisman’s positive theory. I know I didn’t think his critique of Bohm/Fetter/Mises worked.
To me, it seems as if the way different economists define the rate of interest is somewhat different. Mises saw interest as a price, whereas in your dissertation you consider it more of a return on savings or investment. I look at it as a price, as well, but I haven’t really thought about what exactly it is a price of.
On that note, that it is a reward “for parting with liquidity” is one thing, but what’s the causality? Mises denies any causality between the decision to “part with liquidity” and the interest rate (he explicitly denies the idea that the volume of savings dictate the rate of interest). Rather, Mises argues that the rate of interest decides the volume of savings, since the rate of interest is dictated by intertemporal time preference.
I’m not commenting either way, since obviously I’m still fleshing out some of the basic structure to the issue — i.e. what is it a price of? I’m just saying that it’s interesting that different economists approach the topic from different directions.
Yeah, this is what bothers me about liquidity theories of interest. I can earn non-trivial interest by buying a 10-year government bond … and yet, I’ve lost virtually no liquidity. Certain debt instruments have a liquidity premium, but loaning money at interest needn’t mean you lose any liquidity.
Interest rates can’t go up after you’ve bought a 10-year bond? When you put $1000 in, you’re sure you can get $1000 out whenever you want?
That’s what Keynes is talking about in Chap 13, not just the difference between a house and a bond in terms of standard liquidity.
That’s an issue of the bond losing value, not losing liquidity.
That’s fine–and your usage is the standard one–but I’m just saying that when Keynes says people hold cash because of “liquidity preference,” he has this sort of thing in mind. If you keep your savings in the form of actual cash, there’s no doubt that your $1000 in savings will be $1000 in savings whenever you want. (The purchasing power might go down, of course, if there is price inflation.) But if you buy “$1000 worth” of riskless bonds, you have to hold them to maturity to be sure you can get your money back. If you have to sell early, you might not get the $1000 back. So the rate of interest has to be such, as to balance of the advantage of cash versus bonds.
Well, there’s a lot to be said here, but, to be as brief:
It is _not_ encouraging when someone starts using the same word for both concepts — or even tries to override the common usage for a different usage.
Not surprisingly, Keynesians end up *insisting* that the government provide “liquidity” to _risky_ businesses (as in the case of TARP), thereby blurring the concepts of liquidity and risk/solvency/creditworthiness.
Frankly, I’m fed up with the way “liquidity” has been abused since ’08 … these days it means something more like, “free cash”.
I think we’re running into the two different conceptions of liquidity – a) the sense of a market in which one can easily exchange the good for the prevailing market price without influencing the price, and b) the sense in which Bob is using it, i.e., assuming the risk that its value may vary from its original price, nominal value or face value.
Jonathan,
Mises expressly says it’s not a price, and I expressly say in this blog post that I agree w Keynes that it’s not a return to savings. 🙂
He may be able to define what the interest rate is, but the first sentence from this selection proves he doesn’t grasp its relation to time preference.
How?
“the rate of interest cannot be…waiting”. It’s true that the rate of interest is not a physical object, as he later defines, and waiting is a physical task so, obviously, a ratio cannot be a physical task.
But later in the passage he contradicts this obviousness, by stating that the rate of interest is, in fact, a physical thing – a “reward”.
Therefore I must conclude his first sentence statement truly means that the rate of interest does not reward waiting (i.e. continued savings, i.e. hoarding).
We know that the rate of interest directly influences whether we spend, rent, or save and that one could be rewarded by saving instead of renting by correctly gauging that ratio in a potential transaction.
After all, if I don’t lend my money to someone I can assure that I at least have the same amount. That’s a much better situation, a reward if you will, than if my trading partner could not even return the initial amount at the end of the lending term.
Interest rates are not a unitless ratio, never have been.
Wait, so how would you explain the exchange rate between USD and yen? I don’t buy yen for the sake of buying yen, I buy yen for the sake of buying Japanese goods with Japanese yen (that I don’t personally buy the yen, but someone else does for me, doesn’t change anything).
Maybe I’m missing the point.
Just to throw a wrench into things, there used to be a pretty good carry trade with the yen. With US interest rates as low as they are (and, upward pressure on the yen), it isn’t as good of a carry anymore.
On the flipside, there is carry trade involving borrowing in the U.S and investing in places like China – which is likely to blow up when the China bubble bursts. No, I don’t know if that will happen next year or after 5 years.
Yes, it will burst, that is for sure. They’re trying to tighten.
Nooooooooooooo!
That’s Bob as he realizes that in his slip into the dark side, he lost the most important thing.
Yes, the nominal rate of interest on loans is the difference between money received in the future versus money given up in the present. But this difference cannot possibly be a product of liquidity preference, for this difference is not between what is hoarded and what is consumed and invested. It is the difference between what is consumed and invested only.
Imagine everyone in the economy hoarding maximum cash, and investing the minimum and consuming the maximum out of the remainder, versus an economy where everyone is hoarding minimum cash, and investing the minimum and consuming the maximum out of the remainder.
To give some numbers to this, imagine in the first economy everyone comes to hoard $900 each, and they earn $100 per period, which they invest $10 and consume $90. In the second economy, everyone comes to hoard only $100, and they earn $900 each period, which they invest $100 and consume $900.
What will the interest rates, or rather the interest rate (since everyone has the exact same spending/hoarding/investing patterns) tend to be in each economy? According to Keynes, because the liquidity preference is so much more higher in the first economy than in the second economy, the interest rate should be drastically different in the first economy relative to the second economy. But will they be different? No. Here’s why:
In the first economy, aggregate investment is $10*N and aggregate consumption is $90*N (N = number of individuals). This means that out of all money received through sales (labor, goods, etc), which is ($10 + $90)*N = $100*N, there will be $10 that will show up as business costs (ignore depreciation and assume for simplicity that the $10*N capital invested each year is used up each year) and $100*N that will show up as revenues.
Here, the “natural” profit in the first economy will be the difference between aggregate revenues and aggregate costs. Aggregate revenues are $100*N and aggregate costs are $10*N. That means aggregate profit will be $90*N. The aggregate RATE of profit is the profit divided by capital invested, which is $90*N / $10*N = 900% (yes, that rate is huge, but the number doesn’t actually matter for the purposes of this discussion).
Here is where the rate of interest comes in. If the aggregate rate of profit on capital invested is 900%, then what will tend to occur is that anyone who wants to “part with their liquidity” for investment purposes, will have two investment choices. Either they can invest the money themselves and try to earn the 900% average profit, or they can loan it to others who will then invest it and try to earn the 900% average profit.
The supply of loanable funds, no matter what the quantity (in the first economy it is $10*N maximum supply), will tend to carry an interest rate of around 900%. This is because if an investor can earn 900% on his money, then should he loan the money to someone else instead, he’ll want to ask for a 900% interest rate and he will tend to get it as well. If any borrower offers him less than 900% interest, then the investor can just take his money and invest it directly himself and try to get the 900% profit. In order to induce him to “part with his liquidity”, the borrower will have to offer him an interest rate of around 900%.
Now let’s look at the second economy.
In the second economy, aggregate investment is $100*N and aggregate consumption is $900*N (N = number of individuals). This means that out of all money received through sales (labor, goods, etc), which is ($100 + $900)*N = $1000*N, there will be $100*N that will show up as business costs (ignore depreciation and assume for simplicity that the $100*N capital invested each year is used up each year) and $1000*N will show up as revenues.
Here, the “natural” profit in the first economy will be the difference between aggregate revenues and aggregate costs. Aggregate revenues are $1000*N and aggregate costs are $100*N. That means aggregate profit will be $900*N. The aggregate RATE of profit is the profit divided by capital invested, which is $900*N / $100*N = 900%. Notice something familiar?
The supply of loanable funds, (in the second economy it is $100*N maximum supply), will tend to carry an interest rate of around 900%. This is again because if an investor can earn 900% on his money, then should he loan the money to someone else instead, he’ll want to ask for a 900% interest rate and he will tend to get it as well. If any borrower offers him less than 900% interest, then the investor can just take his money and invest it directly himself and try to get the 900% profit. In order to induce him to “part with his liquidity”, the borrower will have to offer him an interest rate of around 900%.
The error that Keynes made was to fallaciously assume that when people “part with liquidity”, it only goes to investment. If parting with liquidity, i.e. giving up cash, i.e. trading using money, only went to investment, then yes, it is possible to conceive of the rate of interest as determined by liquidity preference. But when people part with their money, they can either invest it or consume with it. THAT DIFFERENCE between investment and consumption is what generates profit in the economy, it is what generates a difference between what business spends on factors and what they receive in revenues, and it is what generates nominal interest rates on loans.
Mises called the 900% aggregate rate of profit, that I showed above, as “originary interest.” This difference is monetary as in your dissertation Bob, that is, the difference between money out and money in, or exchange rate between current dollars and future dollars, and, most importantly, this difference is determined by time preference, not liquidity preference.
To part with liquidity does not necessitate being compensated by interest. One can part with liquidity and consume with one’s money, and not earn any interest either. Hoarding cash and consuming using cash do not earn any interest. Where interest arises is by the difference in value people attach to present GOODS versus future GOODS. The nominal rate of interest on loans is manifested by the difference in money in and money out, which is itself a function of the difference between investment (which generates costs and revenues) and consumption (which generates only revenues). That
Liquidity preference differences did not change the rate of interest in my two examples. In the first economy, people had a huge liquidity preference, and in the second economy they had a relatively smaller liquidity preference, and yet in both cases, the rate of profit, i.e. originary interest, i.e. the difference between money out and money in, i.e. the exchange rate between current money and future money, i.e. the rate of interest on nominal loans, was 900%. That 900% is determined by the difference between investment spending and consumption spending, that is, by time preference.
Austrians win, Keynesians lose.
Darn typos.
To give some numbers to this, imagine in the first economy everyone comes to hoard $900 each, and they earn $100 per period, which they invest $10 and consume $90. In the second economy, everyone comes to hoard only $100, and they earn $900 each period, which they invest $100 and consume $900.
Should read:
To give some numbers to this, imagine in the first economy everyone comes to hoard $900 each, and they earn $100 per period, which they invest $10 and consume $90. In the second economy, everyone comes to hoard only $100, and they earn $1000 each period, which they invest $100 and consume $900.
MF, I’m just being honest with you here, I come to my blog when I’m taking a break from “real work.” Your posts are too long for me to even read, because I know it would take me longer than the 5 minutes I want to devote to the break. So that’s why I don’t grapple with you often (esp. on the Sunday posts). If you have 18 reasons that I’m wrong, just post the top 2. 🙂
No worries at all. I’m not the kind of person who gets offended or upset just because someone doesn’t respond to every single thing I write asap. It would be uncouthe for me to expect that from you. I understand you’re busy and everything. I post more for my own benefit anyway, so if nothing else, you can be sure that at least one person is reading what I am writing (me, LOL).
Cheers.
Maybe you should encourage more concise posts by threatening to demote him back to Captain?
Good idea, but after reading Joseph Fetz’s article I decided to sleep in all day. I’ve been given a general discharge and can no longer promote or demote anybody.
Hey now.
Don’t go dragging me into this.
With regard to the debate over interest, I am of the belief that interest arrises due to a combination of factors, one being time preference, the other being expected return (the price yielded for parting with money for a specific time period), and the risks associated. That is why I stayed out of the debate. And, honestly, I think that this is consistent with Rothbard’s writings, but not Mises.
Of course, the other factors determining the rate of interest entirely disappear in the ERE, where uncertainty simply does not exist, thus leaving an unchanging time preference that is uniform within the entire market.
Bob, I’m appalled.
You wrote the study guides to HA and MES. You don’t agree with Rothbard on interest theory?? And for that matter, the whole chapter 6-10??
Mattheus, do the double question marks change the meaning of your queries? Have you read my second essay in the linked dissertation? I explain what my problems with Mises and Rothbard are.
Yes, I wrote the study guides, and so if you never suspected that I doubted the time preference theory, then I did a good job summarizing Mises and Rothbard. Thanks for the compliment!
OK, this reasonable response makes my youtube video look completely ridiculous.
THANKS A LOT BOB!
The double question marks are to signify surprise. As in, do you really disagree with Rothbard on this??????????????? (for example)
No, I didn’t check out the link. I’ll do that now.
Gosh, first it’s Hoppe and argumentation ethics, now it’s time preference theory of the interest rate – Are you really an Austrian anymore? (I kid)
Bob isn’t the only Austrian who disagrees with the pure time preference theory of the interest rate. Hulsmann does as well (but I believe he is partial to Hoppe’s argumentation ethics, if it’s any consolation);
http://mises.org/journals/qjae/pdf/qjae5_4_7.pdf
Also, Austrian Jeffery Herbener has criticized both Hulsmann’s and Murphy’s critiques;
http://mises.org/media/5904/The-Pure-Time-Preference-Theory-of-Interest-and-Its-Enemies
Guido and I can both bench Herbener, so I think that settles this particular dispute.
It takes both of you to bench Herbener?
Besides, I’ve heard Herbener can ‘chin’ with one hand. That has to count for something.
Jeffery Herbener, I think, gives a good response to the criticisms. He says “The confusion is based on the lack of distinction between exchanging present goods for future goods and exchanging present money for future money that Fetter cleared up decades ago.”
Hayek didn’t agree with it either, though he thought it could apply in certain limited cases. He says this in a paper called “Time preference and productivity: a reconsideration”. In “The Pure Theory of Capital” he uses exclusively productivity based interest, but the paper I mention above is intended to be an amendment to that position.
http://www.youtube.com/watch?v=oRf4CSHlNNw&feature=related
Don’t be a jerk – Bob Murphy is a hero of mine.
Hi Bob.
Of course, on this, as with everything else, I am a neophyte and merely seek to learn at the feet of the masters, but two or three questions:
1) Presumably, the advantage of liquidity is that it gives one the flexibility to act at any point (in time) of one’s choosing. In other words, waiting is not required and acting now is not costly. What is the difference between interest as compensation for waiting and interest as compensation for giving up liquidity? Isn’t a contractual shift of liquidity in effect the means to effect the waiting?
2) Another question might be whether interest exists in a non-money economy, i.e., an economy within which very little liquidity exists? In that situation, by lending, one is not giving up liquidity. In that case, interest can’t be compensation for giving up something you don’t have (liquidity), can it?
(1) is pretty good David, not sure how to answer that right now.
(2) is my point in my dissertation. You can’t define “the interest rate” in a barter economy, unless you are in (what Mises would call) the evenly rotating economy. In other contexts Austrians are really big on the danger in abstracting away from the role of money, and they chastise mainstream economists for analyzing the economy as if it were direct exchange. And yet, when it comes to interest which is a transaction with money on both sides, the Austrians are OK with abstracting away from the fact that it’s money!
I took a crack at your dissertation a couple of years ago. I’ll have to look at it again.
Say Bob, were their any critiques or responses to your dissertation published from the Austrian side?
>You can’t define “the interest rate” in a barter economy, unless you are in (what Mises would call) the evenly rotating economy.
When I was a kid I gave my friend a packet of chewing gum for the promise that he would give me two the next week. Isnt that interest rates without money?
Money is just a product.
Hugo: Two responses to your chewing gum example:
(1) OK, but Austrians are inconsistent then because in cases where I give up 10 units today for 8 units in the future, they don’t count that as negative interest. Then they say, “They’re different goods.”
(2) I’m not denying that there are “own-rates of interest” on individual goods. What I’m denying is that arbitrage causes them to equalize each other. So you can’t explain “the” rate of interest by reference to the multiplicity of intermtemporal exchange ratios among different goods. It would be like saying, “The reason the USD trades for 80 yen is that on the margin, Earthlings think US goods are 80 times more valuable than the same Japanese goods.” That would be crazy, no one would say that because (a) it would be demonstrably false and (b) it would involve crazy aggregation.
‘What is the difference between interest as compensation for waiting and interest as compensation for giving up liquidity? Isn’t a contractual shift of liquidity in effect the means to effect the waiting?’
Yes, I think; not sure you can seperate the two. A shift in liquidity necesitates waiting, for a return on the shift. Pure liquidity can not exist if one has to wait for par value. Even an off-the-run t-bil is not completely liquid.
The way I always looked at it is: Options have value. Absolute liquidity (riskless) provides the most options, no liquidity (max risk) provides none. (The risk-reward profile is implied in the price of the financial assets pre-shift, unless there is a fundamental ineffeciency in how the risk is priced.)
Hey I just noticed that (1) is exactly what I was trying to say back in the ‘Krugman on Keynes” thread. I got told that the concepts of liquidity, long-term vs short-term investments, and expected return on those investments were all completely unrelated.
Needless to say, I’m in full agreement with (1) above and have not in the slightest changed my position on the matter, but obviously David can explain these things better than I can *shrug*.
I read your dissertation a couple years ago. And read it again awhile after. I really thought you were right, but the broader implications that Mises and Rothbard spell out (business cycles, etc.) didn’t seem to change. What are your thoughts, Dr. Murphy?
I still think the ABCT is the closest to the truth of all the major theories. But I do think there is a problem in treating interest as a “real” phenomenon, as opposed to a monetary one. I can’t believe Mises of all people was telling us not to think of interest as involving money.
Right. And that was the major point of your dissertation, which is why I thought it was good. It doesn’t make sense to talk about interest apart from money.
But like you said regarding the flexibility of wages, I don’t understand Keynes’ problem with people “hoarding” money. If they are withdrawing from the banking system, that’s of course deflationary given FRB (and therefore more problematic that it need be), but I don’t see why the price of goods and services wouldn’t just adjust to the new (monetary) demand (assuming people were holding money).
Moreover, how is “hoarding” money different from “demanding more liquidity”?
So if I’m a chicken farmer and you’re a brewer I shouldn’t expect a larger or higher quality keg of ale if I give you chickens now for the beer later?
…than I would expect if we traded chickens for beer at the same time.
(a) Not necessarily, and
(b) what happens when the premium on chicken is 10% per year, and the premium on beer is 3% per year? What’s “the” rate of interest?
Bob,
Could you explain the concept of premium?
In this context, if market prices are such that one liter of beer right now trades for 1.1 liters of “the same” beer available in 12 months, then the premium on beer is 10% per annum. So there’s no reason–even in a no-profit equilibrium situation–for those premia (or “own-rates of interest”) to be equalized across all goods. The only way you’d expect them to be equalized is if you were in the evenly rotating economy.
So Austrians talk about the pure rate of interest being equal to “the” higher valuation of present goods over future goods, when in reality there is no such thing. They think the deviations from it, in practice, are due to uncertainty but they are wrong. Even if the future were certain, so long as the various things changed (like relative quantities of wheat versus peanuts versus oil etc.) over time, then spot prices could change and there would be no single barter rate of interest.
“The” rate of interest only exists at the moment of trade.
Agreed?
3 litres of lager, but for you I’ll also accept ale.
But as you pointed out in your dissertation, you can hardly compare a good today to a good sometime in the future. For example, I’d give you 100 lbs of ice in February in return for 10 lbs of ice in July. Now, you could say they are “different goods”, but that’s kind of the point, isn’t it?
That’s what he meant by (a) not necessarily
Borrow beer, exchange the beer for chicken at the marketplace, then lend out the chicken at 10% premium. When the chicken gets paid back, exchange it back for beer again and pay back the original beer loan. With some beer left over!
Mmmm, beer.
No. Dr. Murphy posed and answered that question quite thoroughly in his dissertation.
Dr. Murphy kind of jokes about his “neglected dissertation”, but I think it is a very important read for any Austrian (and anyone else for that matter).
From reading the downloaded PDF, Murphy’s argument seems to be that future shifts in the exchange rate between commodities will zero out the arbitage. However, that presumes that the market has full knowledge of future shifts.
The same can easilty apply to money, if the Fed says that their “target inflation rate” is 3% then everyone just factors in the expectation of 3% inflation (i.e. the exchange rate between money and other goods) and thus they discount future money at 3% P/A plus whatever actual intrinsic future discount applies (i.e. the natural interest rate).
Of course, not everyone trusts the Fed to deliver what they advertise so a risk factor does come into play on top.
Tel, yes, all the examples involve certainty of the future spot prices. That’s to make sure people realize I’m not making a disequilibrium argument. Austrians know that in reality, the “internal rate of return” or “own-rate of interest” can differ among commodities, but they (falsely) believe it is due to entrepreneurial error. So I have to set up an example where there is perfect foresight–yet changing conditions–to show that their views on “the” general premium of present vs. future goods are simply wrong. There is no arbitrage action to equalize the “real” rate of interest in an economy outside of the ERE.
It seems most people steeped in econometrics easily lose focus on the purpose of money: simpler trade.
I’m glad my cake Keynes classes that just demanded I learn a few nonsensical equations happened about 20 years ago and have all but evaporated from my memory.
PPF? PuhPuhPlease. Second quarter 5th grade level math exercises dressed as global trade policy prescriptions.
The most valuable economics lesson I learned in micro was that I could trade some math ability and test answers for quality time with a gorgeous woman.
Doesn’t Mises explicitly argue that the market interest rate is not the same thing as the natural rate of interest? I.e. doesn’t Mises, here, admit money’s role in deciding the market rate of interest?
Jonathan, are you talking about fiduciary media?
Anyway, yes he can make that distinction, but I’m saying the pure natural rate of interest is itself a non-Austrian concept. It only exists in the ERE. I’m not saying that it can only be measured in the ERE, I’m saying it only exists in the ERE. There is no such thing as “the” premium on present vs. future goods, just like there is no such thing as “the” premium on American versus Japanese goods.
To answer your earlier question, yes, of course to explain the exchange rate of USD versus yen you would ultimately be talking about the price of goods in each country. But still, you would never as an Austrian say American goods were preferred to Japanese goods, because that is such an outrageous and unnecessary aggregation.
After listening to Jeffery Herbener talk about Fetter I pulled up The Principles of Economics. In chapter 17 he appears to alleviate the problem you see with PTPT.
“1. Time-value is the difference between the values of things at different times. Things differ
in value according to form, place, quality of goods, and according to the feelings of men, and—
not least important factor—according to time. The simplest and clearest case of time-value is the
difference noticeable in the same thing at different moments. Is this good worth more now or
next week? Shall this apple be eaten now or next winter? These questions can be answered only
after comparing the marginal utilities which differ according to the varying conditions of the two
periods.
All the other cases of time- value can, by the practical device of substituting other goods of
equivalent value, be reduced to the typical case of comparison of the same thing at different
times. The comparison may be between very similar things, the one consumed being replaced by
a duplicate. An apple borrowed now may be returned next year in the form of one of the same
size and quality. The essential thing in this comparison is not physical identity, but equivalence
in size, sort, and quality at the two periods. This is borrowing under the renting contract.
But two or more quite different things may be expressed in terms of another thing and so be
made comparable. Money becomes the value-unit through which different things may be reduced
to the same terms for comparison. With this mode of expressing the value-equivalence of vari-
(p. 142) ous goods, the interest contract first becomes possible, money (the standard of deferred
payments) being the thing exchanged (possibly only in name) at two periods of time. What is
really compared are various gratifications which may be produced by very different material
things or services. In its last analysis comparison of values at different periods of time must be a
comparison of psychic incomes, of two sums of gratification. The comparison of the value of a
bushel of apples with that of a barrel of potatoes or a suit of clothes at the same moment appears
simple enough. When all are expressed in terms of money, the comparison of each with its valueequivalent
at a later date becomes easy. The simplicity and obviousness of time-value in the case
of money loans at interest led men at first to recognize that phase, of the problem exclusively,
and later the term “interest,” not without much confusion of thought, was given a wider
significance.”
It seems like he agrees that the interest rate is not determined by present goods vs future goods but by present money vs future money. Would you agree that this distinction would solve the confusion?
Sure Dan, I agree that if we abandon the Austrian theory of interest, then I have no problem. 🙂 But the Austrian theory of interest clearly says interest is due to the preference for present over future goods.
Well now I’m confused. Rothbard said this about Fetter,
“Thus, Fetter was the first economist to explain interest rates solely by time-preference. Every factor of production earns its rent in accordance with its marginal product, and every future rental return is discounted, or “capitalized,” to get its present value in accordance with the overall social rate of time-preference. This means that a firm that buys a machine will only pay the present value of expected future rental incomes, discounted by the social rate of time-preference; and that when a capitalist hires a worker or rents land, he will pay now, not the factor’s full marginal product, but the expected future marginal product discounted by the social rate of time-preference”
http://mises.org/daily/1965
Is Rothbard not understanding the distinction that Fetter made in describing it as present money vs future money or is Rothbard just being sloppy by describing it as present goods vs future goods? If you agree with Fetter and so does Rothbard, I’m not sure how that works out.
Dan I’m not sure. All I’m saying is, you presented me with a quote from Fetter that said, “We’re not really looking at the goods themselves, we’re ultimately talking about money when we say interest is due to time preference.” So yes, I agree that we can explain a 10% nominal rate of interest by reference to people being willing to part with $1 today only by the promise of $1.10 in the future.
Yet the Austrians say more than that. They say this is just a symptom of the more general phenomenon that there is a preference for present goods of 10% more than future goods. So I’m denying that part of their story.
Bob, I agree with you that we should look at money and its interest without the idea of present over future goods, but you dont have consider that vision wrong, just a simplification.
At the end, money is just another product of the market and therefore it can have demand and supply on its own. It has also interest rates. But we humans want money, a means of exchange, to buy other products in the future. So if we make some jumps and simplify the interest rates could be, as a metaphore, the preference of present goods over future ones, because money is used to adquire those goods.
In my opinion the tradicional austrian idea of interest rates is a nice and correct metaphore, but it is too vague and does not allow us to study close enough what really is going on. So it would be positive to treat money as its own product with its own supply and demand and its own interest rates to get a more realistic vision of what is going on. But I dont think it really breaks austrian theory, it just improves it.
Wow very complex discussion on interest. I am a noob and probably not even addressing the real concern here, but interest is simply the shared production from unconsumed goods/services. I provide a product for nothing in return(in the present), which helps someone else produce even more(in the future). We then share in the further production. Everything else is over my head.
“the rate of interest is the reward for parting with liquidity for a specified period” (Keynes). Really?
So if you lend me a less liquid good (say $10,000 worth of bushels of apples) you are going to charge me an smaller interest rate than if you lend the $10,000 instead, right?
Because in the apples case you already parted with part of your liquidity, as compared to the cash, and you shouldn’t receive the same reward (interest rate). I’ll be glad to do business with you buddy.
“It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before” (Keynes). To save and to wait are two very different things
SAVING: Why is somebody going to pay anybody for saving? Who benefits from me saving cash (whether in a bank account or under my mattress), bushels of apples, pineapples, more liquid or less liquid assets, as to pay something for it? None, just me.
WAITING: may somebody be willing to pay me to transfer my savings to him AND WAIT until some future time to receive them back so he can benefit meanwhile? well, I think I can come up with a couple of people. Now I just have to see if what they are willing to pay offsets my preference for having my savings (cash, apples, or whatever) under my control now rather than in the future.
Dr. Murphy I just wanted to apologize for the tone of my post. I’m re-reading it and it has a cocky touch that I really don’t like.(And it wasn’t intended).
It’s obvious that you know infinitively more than me about the subject, nevertheless it seems like it’s me the one with the PhD.
But in a purely free market w/ sound money, one WOULD gain purchasing power by simply “hoarding cash,” since prices would gradually fall over time. It’s only when you throw central banking (and the inflation it brings) into the picture that one must part with liquidity in order to earn ‘interest.’
Maybe you would choose not to categorize this as interest, but it certainly throws a monkey wrench into Keynes’ “liquidity preference” explanation. Any thoughts on that?
Yes, this is true. You would see real supply/demand for assets. Hoarding money would be fine, but earning 1-4% in a savings account would be even better.
Dr. Murphy,
I assume you read Hazlitt’s “The Failure of the New Economics”, I haven’t, but that is why I am asking the question…Since his book is supposed to be a more or less line by line refutation of Keynes’s General Theory, I am curious as to how he reacted to the parts of chapter 13 that you found so brilliant. Have your read Hazlitt’s book and if so, how does his reaction compare with yours? Thank you very much.
Hazlitt’s book is available free online if you want to check out what he says yourself…
http://mises.org/resources/3655/Failure-of-the-New-Economics
Thanks for the link to the Hazlitt book. After reviewing it just now, the following seems quite reasonable to me:
“In the same way, it is the composite time-preference or
time-discount schedule in the minds of both borrowers and
lenders that determines the rate of interest, the position of
the investment demand curve and the position of the supply-
of-savings curve, rather than the supply and demand
curves which determine the composite time-preference
point.”
And a few paragraphs down:
“Each saver’s and entrepreneur’s time-preference or timediscount
(including his estimate of the composite timepreference
or time-discount of the community as a whole)
will help to determine the current rate of savings or the
current investment demand; but at any given moment the
points of intersection of these supply and demand curves
will “determine” market rates of interest.”
Thanks for the info, but I know all about the link. My point is that I am not a PhD economist, but Bob Murphy is. He is also an Austrian who likes Mises, so he would give Hazlitt a fair reading. That is why I wanted Dr. Murphy’s opinion. It is a form of schoolastic (scholastic?) reasoning. He said this, what do you say to that…In this way, by seeing the experts respond to each other, point by point, the novice can save lots of time at getting to the truth…I still wish Dr. Murphy would answer this question
Thanks for the info, but I already know about the online link. My point is that Bob Murphy is a PhD economist but I am not. He is also an Austrian who likes Mises, thus he would most likely give Hazlitt a fair reading. It is form of Schoolastic (Scholastic?) reasoning on my part…By getting the experts to respond to each other point by point, and carefully thinking about those responses, the novice can save a lot of time in getting to the truth. For example, maybe, because of his academic background in economics, Murphy can see something in Hazlitt that I have failed to see, but then again, maybe not…I still wish Dr. Murphy would respond to this question…Thank you very much.
Senyoreconomist, I think some of Hazlitt’s critique is fantastic, but other stuff (in particular his reliance on the pure time preference theory) is wrong. I actually use Hazlitt’s critique of Keynes to show Hazlitt doesn’t get the implications of the pure time preference theory. I.e. in my dissertation I quote from Hazlitt’s book, to make a point against the Misesian theory of interest. So Hazlitt is right in the narrow use to which he puts that argument, but he doesn’t realize it blows up the Misesian theory of interest.
Dr. Murphy,
Thank you very much for your reply. This is the sort of stuff I am after. Your reply was very useful. Once again, thank you very much.
Off topic, but Bob Murphy nemisis “Lord Keynes” is on a roll over at Bill Anderson’s Krugman blog pontificating and citing chapter and verse while ignoring the concepts of economic calculation and “the pretext of knowledge” especially on the two most recent posts.
http://krugman-in-wonderland.blogspot.com/
I don’t know why he keeps reading us, since we are too stupid for words.
LK may be the only anti-Austrian on the planet who actually reads our stuff. I find it fascinating because he does all this work finding alleged mistakes and inconsistencies while maintaining a purposeful ignorance of the concepts of economic calculation and “the pretext of knowledge”.
http://tinyurl.com/3qdpr7c
He never explains how the government has more and better knowledge than the economic actors themselves, aka average people?
If you bother to read my blog, I dont regard all Austrians are “too stupid for words.” Some Austrians support stupid/false arguments, just as you would reject the pure time preference theory of the interest rate as false when held by fellow Austrians.
There are some highly intelligent things written by Lachmann, Mises, Rizzo, O’Driscoll.
LK, I said you call me and Anderson too stupid for words. You have. I’ve read your blog, that’s how I know you say we are too stupid for words.
You mean in my critique of your article here?:
http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html
One of your major suggestions is that the tiny spending increases in 1930 and 1931 could have stopped the depression: that is absurd and I make no apologies for calling you on what is patent nonsense.
In contrast, your rejection of the pure time preference theory of the interest rate is intelligent, sound and deserves praise.
And I am reading your PHD with interest – no doubt I will learn a great deal from reading it too.
I recall Bob Murphy’s depression book saying:
1. That the increase in Roosevelt’s spending over Hoover’s was not large enough to have made much difference;
2. There were super low interest rates in 1931;
3. Hooever was an interventionist and there is no way to blame the results of what he did upon “liquidationism” or “laissez faire” (if only).
Of course Hoover’s spending did not help, tiny or not.
“Hoover” not “Hooever”
Roddis, I think you meant “pretense of knowledge”.
I did mean “pretense”. But I’m senile.
Actually, “pretext” also sorta applies.
“A pretext is an excuse to do something or say something. Pretexts may be based on a half-truth or developed in the context of a misleading fabrication. Pretexts have been used to conceal the true purpose or rationale behind actions and words.”
Keynesians pretend they know how to run the economy so that they might loot us.
I must say there is some truth in there.
No biggie, I have made the same mistake (accidentally substituting pretext for pretense). Yes, either could apply. Where one is making a falsity appear true, the other is using a falsity as a justification.
Hey Bob,
So I’ve been trying to figure out what all this fuss about, and to be honest I think the subtle distinctions about time preference theory and why its flawed went right over my head to begin with! But your statement that not only did you like the passage from Keynes on interest (which seemed quite reasonable to me too) but moreover that you felt it was superior than what Mises wrote on interest compelled me to try and figure out what this whole debate is about.
I decided to check out your dissertation and am currently on page 165 of it. The below quote really helped to drive home the validity of your monetary theory of interest. I thought your comments critiquing the Austrian theory of interest for being un-Austrian earlier on in the dissertation were extremely insightful as well. I will readily confess that a good chunk of this is over my head, but I just wanted to take a quick break from reading your dissertation to comment on how brilliant this paper is. Equally impressive is how well you express your ideas and remain open to all sides of the debate, as opposed to becoming polarized in one camp. The civility in which you handle some of these commentators is remarkably impressive as well.
I think I might have learned just as much from you in terms of raw content, as I have about how to think about the problems of economics in general. I think you are setting a fantastic example of how we should all strive to behave as either students or teachers, and I think the economics profession as a whole only stands to benefit if more follow your stellar example!
Wow I totally didn’t expect to write up such glowing praise when I began this thing. What a phenomenal example of the inability to perfectly forecast my knowledge/value scale at T1 [start of comment on Bob’s blog] to T2 [midway through said comment!]
“Even if an agent possesses no “time preference,” so that he currently considers the consumption of
real goods in period t+5 to be just as good as consumption in t+6, he will still value
(even at a zero rate of interest) a unit of money delivered in t+5 more than a unit of
money delivered in t+6. This is because the agent need not spend his delivered money units on (then) current consumption. In period t+2, for example, the agent may become aware of a future opportunity (or crisis) of which he had previously
been ignorant. No matter how his preferences change, the earlier claim on money
will be capable of performing any service that the later claim can, but will also
provide liquidity during the interval from t+5 to t+6.”
Just finished(not including the Appendix, I don’t have the appropriate knowledge to follow you there!) Very, very impressive read. Is there any format you could republish this in, such as a journal or something of that nature? It seems quite relevant to the aspiring student of Austrian Economics to come across such a significant piece of work, and obviously it would be more beneficial if it was easier to find!
Either way, really nice work.
Thanks Robert. I just want to reassure everyone that I am not posting praise of myself as “Robert.” (I’m not really Major Freedom either, though that would be funnier.)
Hahaha ya that would be funny. Ya I’m definitely not Bob’s backup account. I’m Robert Fellner, world-class poker player whom after the government shut my industry down appeared on The Stuart Varney show! At which point when I was asked the question, “Was there anything illegal about the form of poker you played?” replied, “No, the only one who did anything illegal here was the government!” Face!
http://robertfellner.blogspot.com/2011/04/representing-lvmi.html
I loved the Rothbard shirt, I wear mine all the time. I also loved Varney saying it was Barry Goldwater.
Are you related to Dwayne Johnson?
🙂
Bob Wenzel has announced that Bob Murphy has moved to the dark side:
http://www.economicpolicyjournal.com/2011/07/bob-murphys-move-to-dark-side.html
Taylor Conant commented that “You know you’ve done something wrong when someone like Daniel Kuehn is the first in the comments to cheer you on.”
Yeah, I saw that a few hours ago. I figured I’d sit back and watch Bob and Wenzel hash that one out; should be interesting.
I already know about the online link to Henry Hazlitt’s book, my point is that you are a PhD economist but I am not. You are also an Austrian who likes Mises, thus you would most likely give Hazlitt a fair reading. It is form of Schoolastic (Scholastic?) reasoning on my part…By getting the experts to respond to each other point by point, and carefully thinking about those responses, the novice can save a lot of time in getting to the truth. For example, maybe, because of your academic background in economics, you can see something in Hazlitt that I have failed to see, but then again, maybe not…I respect both Hazlitt and you. so I would like to see how you respond to Hazlitt. As you well know, I cannot ask Hazlitt about you…Thank you very much.
Here’s the only reply you need
http://www.economicpolicyjournal.com/2011/07/bob-murphys-move-to-dark-side.html
the first line of the above entry should be, “I know about the link to Henry Hazlitt’s book, “The Failure of the New Economics,” but my point is that I want your opinion because you are Phd economist, but I am not.” Sorry.
Regardless of one’s understanding of the nature of interest, I fail to see a justification for the sending out of SWAT teams to enforce Keynesian edicts. The pricing process remains the only way to determine what the rate of interest “ought to be”.
Also, thanks to Richard Moss for the link to the Hazlitt book. For whatever reason, I didn’t realize it was online. I’ve have my copy since 1977, but having it online is so much better.
Did Irving Fisher ever explain his abandonment of the pure time preference theory of interest?
I’m not sure what you mean. As far as I know, Fisher always thought the equilibrium real rate of interest was determined by the interaction of subjective time preference and objective productivity of capital.
I don’t get the liquidity thing. People have a certain idea of the “correct” amount of liquidity required to pay the bills, have some emergency funds, etc. The thought process into the correct amount of liquidity does not take investment into account. Investment is always something you do when you have “extra” money. Nobody who is struggling financially will continue to invest in stocks while struggling to pay the bills.
The funds allocated for investment are, by definition, not desired to be liquid, or the person would not have invested them in the first place. Conceiving of interest as some kind of reward for parting with liquidity makes no sense to me. Why would you pay someone to part with something they already have demonstrated they don’t want in the first place?
Rather, it makes more sense to conceive of the interest as part of the profit from whatever you happen to be investing in, as if you had bought the production inputs and sold the outputs yourself. You have, in effect, hired an intermediary to execute the process, and that person gets a cut of the profits as compensation.
The dissertation link is giving me a 404 error.
Bruce, that’s weird. It was working before. Not sure what the deal is.
I’m getting the same error message. I am eager to read it, but some technical glitch is getting in my way.
Weird. I wonder if they shut down my NYU account? (Not kidding–they said they were only supposed to work for the year after we graduated.) I’ll try to post it from this blog tomorrow.
Very interesting, Bob. I’d like to point out that Pierre-Joseph Proudhon held an equivalent theory of interest to that of Keynes’. If you accept Keynes’ theory of interest then you may be interested in reading this article:
Dudley Dillard, “Keynes and Proudhon,” Journal of Economic History 2.1 (1942): 63-76.
I think one can interpret Proudhonian mutualism as a libertarian alternative to Keynesian economic policies. Of course, you probably disagree with Proudhon’s mutual credit proposals and other aspects of his economic thought.