[UPDATE: I’m slightly editing the “exchange” (which are my words of course) between Hayek and Sraffa to make it closer to their actual words…]
It’s a weird situation, I grant you, but I’ve been running around for years saying that the Austrians have never given a good response to Sraffa’s critique of Hayek. (I summarize my views in one of the sections in this paper.)
But wait, it gets better (worse). Here is my summary of the Hayek/Sraffa debate (on this point of “own rates of interest,” I’m not talking about their broader disagreements), with the vocabulary updated to our terminology:
To avoid causing an unsustainable boom, the monetary authorities should set the money rate of interest equal to the natural rate.The unsustainable boom occurs when the banks charge a money rate of interest lower than the natural rate.
SRAFFA: What the heck are you talking about? Outside of the steady state–but even in an intertemporal equilibrium, where there are no arbitrage opportunities–there are as many “natural rates” of interest as there are goods.
HAYEK: I know that, I’m not stupid.
SRAFFA: So…when you say the
centralbanks should set the money rate to the natural rate, I guess it hasthey have to set the nominal rate of interest equal to different numbers, simultaneously?
HAYEK: OK, well, what I’m trying to say is…
Now in fairness to Hayek, he really did get the problem, and he gave a hint of an answer. But that was it. I claim that no one since has ever followed through, certainly not Lachmann who didn’t see the problem. (I tried to sketch what a more comprehensive answer would look like, in my paper that I linked in the beginning of this post.)
OK so assume for the sake of argument that I’ve correctly summarized Sraffa’s criticism. Look at how Glasner and his co-author think they’ve exonerated Hayek:
However, as Ludwig Lachmann later pointed out, Keynes’s treatment of own rates in Chapter 17 of the General Theory undercuts Sraffa’s criticism. Own rates, in any intertemporal equilibrium, cannot deviate from each other by more than expected price appreciation or depreciation plus the cost of storage and the service flow provided by the commodity, so that the net anticipated yield from holding assets are all are equal in intertemporal equilibrium. Thus, the natural rate of interest, on Keynes’s analysis in the General Theory, is well-defined, at least up to a scalar multiple reflecting the choice of numeraire. However, Keynes’s revision of Sraffa’s own-rate analysis provides only a partial rehabilitation of Hayek’s natural rate. Since there is no unique price level in a barter system, a unique money natural rate of interest cannot be specified. Hayek implicitly was reasoning in terms of a constant nominal value of GDP, but barter relationships cannot identify any path for nominal GDP, let alone a constant one, as uniquely compatible with intertemporal equilibrium.
The way I am reading that, it is saying, “Sraffa was wrong to think Hayek had given no guide on how the central bank should set the nominal rate of interest. We can indeed define it, up to a scalar multiple. Really, the problem here is that Hayek didn’t realize there was no unique natural rate of interest outside of the steady state.”
In other words, they conclude what–I claim–was Sraffa’s original point.
My theory is that it is so mentally taxing for people to work through the relative price change / storage cost stuff, that the 8 people* who have done so since the 1940s think that no one else must have been able to.
* The 8 people being Sraffa, Hayek, Keynes, Lachmann, Gene, Glasner, Glasner’s co-author, and me.